Can You Afford to Hire an Employee?

An ideal employee will either make you money, or save you money. But first, you need to figure out if you can afford to take on an employee at all

Even if you have managed to run your business so far as a single person operation, the time will come when adding an employee, or employees, will become the best way to move it forward. An ideal employee will either make you money, or save you money. But first, you need to figure out if you can afford to take on an employee by asking yourself some questions:

What is the total cost of hiring an employee?
Does your business have enough cash to hire an employee?
How will you determine the ROI of your employee?

Here’s how to answer these questions.

It’s time to think about hiring if…

• You’re turning customers away
  You’ve identified new revenue streams but can’t take advantage of them
  You’re having trouble managing your workload
  You can’t find time for personal time, vacations, or even weekends
  You need someone with specialized skills

If the above scenarios have you nodding your head, it may be time to hire. The next step is to determine whether your business has the actual dollars and cents it will take to hire a new employee.

Costs of Hiring an Employee

Annual Salary

Salaries range dramatically depending on the job at hand, experience required, industry, etc. For lower skill positions you will be paying, at the very least, minimum wage which varies from province to province. Here in Ontario, right now the minimum wage is set at $15.00, but that will be rising to $15.50 in October 2022.

Canada Pension Plan (CPP) Premiums

Employers are required to match their employees’ CPP contributions. As of 2022, the employee and employer CPP contribution rate is 5.45% for earnings over $3,500 and up to $58,100.

Employment Insurance (EI) Premiums

Employment Insurance (EI) is a temporary income payable to workers in the event that they are unable to work. In 2022, the federal EI premium rate is 1.58% payable by the employee, with a maximum annual insurable earning of $56,300. Employers are required to pay 1.4x the amount of the employee’s premiums, which is a cost of hiring a new employee that some employers neglect to take into account.

Benefits Programs

When hiring for skilled workers, businesses must provide potential employees with an attractive package which extends beyond annual salary. In Canada, employee benefit packages covering vision care, dental care, and life insurance are, more often than not, a necessity to attract and retain the right employees. However, benefits packages can add considerably to the overall cost of hiring a new employee.

The costs of a benefit package could vary from $80 to $120 per month for a single employee, more for family coverage. Employers need to keep a handle on costs with a well-thought-out strategy and approach, as there are so many coverage options. Consider options such as 80% coverage rather than 100%, include caps on coverage costs (e.g. capping dental coverage for each treatment), or implement combined maximum for expenses such as massage therapy, chiropractor visits, etc. However, do not reduce benefit coverage to the extent that it becomes ineffective as a perk.

When skilled workers are in high demand, employers need to think outside the box and offer more than just monetary benefits. Stocked kitchens, wellness initiatives, etc. are becoming more commonplace as competition to hire the best of the best heats up.

All in all, it’s been estimated that payroll deductions and benefits can add up to 1.2 to 1.4 times the employee’s salary.

Vacation and Sick Days

In Canada, employers must, by law, offer at a very minimum 2 weeks of vacation and 5 sick days per year for employees— one of the lowest paid time off amounts in the world. Offering more than the minimum is increasingly prevalent in today’s workforce, especially with the nuances that surround mental health and the need for employees to take paid time off to rest and recharge.

In fact, paid time off is often a negotiation factor along with annual salary during the hiring process. According to a survey of 1,000 people by Rakutan.ca, given a choice between a pay increase or more paid vacation days, 57% of Canadians would opt for more time off.

Also consider that if your employees don’t use up their vacation days, the employer must pay out any vacation pay owed to the employee for any prior completed “year of employment”. Employers can, however, mandate that vacation time be used rather than paid out.

Hiring Costs

In addition to the hard costs of hiring a full-time employee outlined above, there are the costs involved in making the hire to factor in from placing ads, to hiring a recruiter, to running background checks and more! According to a report by the Society for Human Resource Management (SHRM), it costs employers an average of $4,129 and takes an average of 42 days to fill an open position.

Onboarding, Training and Equipment

Finding and hiring the right person for the job is just the first step. Next comes their integration into the company, which comes at a cost of both time and money. According to a study by Training Magazine, companies spent an average of $1,286 a year on training per employee in 2021, and of course your new employee might require new equipment or additional software licensing fees to be able to do their job (unless they are replacing an existing employee who has left the company).

Time and Productivity

New hires can take 5-6 months to get fully up to speed, with the first 1-5 months focused on training, onboarding and orientation. The reduced productivity of not only the new hire, but also the team members showing the new hire the ropes must also be factored into the overall cost of hiring a new employee in Canada.

Turnover and Recruitment

Many businesses are not always lucky enough to find the perfect fit for the role in the first hire. If a new hire ends up not being the right fit, there are more costs involved in rehiring.

Numbers vary depending on the source, however the general consensus is that when the actual costs of hiring are tallied up—including disruption to the business, training, reduced productivity etc.—it can cost anywhere from 40% to 200% of the position’s annual salary, depending on skills and experience required.

How to Know if You’re Financially Ready for an Employee

Now that you know the costs of hiring, it’s time to do some calculating.

Step one: Create a budget

Take the above costs of hiring and factor them into your annual budget. If you already have a business budget, then you’re one step closer to making a decision on hiring.

Step two: Forecast your revenue

Here’s the fun part—project how much more revenue you think you’ll earn with a new employee. New product lines, more billable hours, whatever makes sense for your business.

Stay on the conservative side, just to be safe. And don’t forget to account for your new employee’s ramp-up time. You may not be able to add that new service in your employee’s first month on the job.

Step three: See what expenses you can cut

Your new hire may also mean you can give up expenses like contractors or outside services.

If you’ve put together your budget, you’ve got the cash flow to pay a salary, and the new revenue of an employee outweighs the additional cost, then congrats! It’s time to write a job description.

Often, the best person to help you decide if your business is truly ready to hire is your accountant. And speaking of hiring, in terms of ROI, hiring an accountant should be the first priority for most small businesses.

Yes, you can make use of bookkeeping software, but the ROI on hiring an accountant, in terms of actual dollars and invaluable business advice and guidance, is very high.

Better still, today’s outsourced accounting providers – like us – leverage modern technology to allow for more efficient financial oversight, streamlined processes, higher security, real-time access, and more. And we don’t take up room in your office, demand benefits or sick time, or even a cup of coffee. Contact us today to learn more about how we can help your business.