The True Cost Of Hiring An Employee

The True Cost Of Hiring An Employee

Social Studies | Posted by - November 11, 2013 at 12:00 am

If you plan to hire in 2014, use these insights to understand the real cost of bringing in new talent.

What's the total cost of hiring each new employee? It may be more than you think.

While the multiple will differ by industry, some experts calculate it costs the employer approximately 1.5 times the employee's salary or wages. So, if you are paying someone $50,000 a year to work for your business, the total cost of that hire may end up around $75,000 once you factor in these obvious and not-so-obvious expenses.

Mandatory Costs
Things change once you hire your first employee. As an employer, you will have to remit Canada Pension Plan (CPP) contributions, Employment Insurance (EI) premiums, and income tax deducted from your employee's income, along with your share of CPP contributions and EI premiums. Learn more on the Canada Revenue Agency website.

  • CPP: You must contribute the same amount that you deduct from your employee's remuneration. (For example, if the employee pays $50 for CPP, you must contribute another $50).
  • EI: You must pay 1.4 times the amount of the employee's premiums. (For example, if the employee contributes $50 for Employment Insurance, you will contribute an additional $70.)

You may also be required to pay Workers' Compensation insurance premiums.

Don't forget WCB
Workers' Compensation benefits are compensation paid in respect of an injury, disability, or death to a worker, under the law of Canada or a province or territory. Most businesses are required to have Workers' Compensation insurance, and as an employer, you may be required to pay premiums just as you would for any other insurance.

If you have employees you will likely have to register your business with your provincial Workers' Compensation Board (WCB) and pay Workers' Compensation insurance premiums based on your industry classification. Check here for more information.

Even if your business is exempt from the insurance requirement, it may be in your interest to purchase it voluntarily. If you're a tradesperson, for example, you may find that customers prefer to deal with contractors who have their own Workers' Compensation insurance.

Hiring Costs
Your business will spend money or tap into existing resources to recruit, interview, hire and train each new employee. The accounting department will be required to set up and administer a payroll account for the new person, which incurs some additional bookkeeping expense. Severance pay may also be considered a hiring cost.

Discretionary Costs
There are additional costs associated with each hire. For example, you must cover vacation pay: a mandatory two weeks of vacation annually after the employee completes one year of employment. (After six consecutive years of employment, the entitlement increases to three weeks of annual vacation.) There are nine statutory holidays, such as Canada Day and New Year's Day, also paid by the employer.

Other discretionary costs may include sick days, company pension plan, profit sharing, group benefit plan, bonuses, incentives, travel expenses and general downtime.

Your new employee will also require a computer, desk, chair, telephone, and office supplies. All of these items require workspace, so be sure to factor in the cost of additional office rent you may incur to house each new employee. Check your cash flow and consider setting up a credit facility to help fund these items.

Bringing on people is a sure sign of business growth. Becoming an employer is a positive move and a natural step in the evolution of your business. By looking into these costs and others, you can properly budget for a new position and avoid any unpleasant financial surprises.

Tags: scotiabank, compensation, cost, employees, hiring, payroll, recruitment, severance, blog

Roger Pierce
With Roger’s experience in starting and running 12 small businesses, it’s no wonder that he is Scotiabank’s small business expert. Roger takes what he has learned and shares it with thousands of entrepreneurs worldwide in articles, blogs, videos, and presentations. He’s also co-author of the book, Thriving Solo: How to Grow a Successful Business.
Melody McKinnon
November 11, 2013 at 3:13 pm
Great summary of traditional hiring expenses. Alternately, you can enter the future of employment and hire remotely, saving massive amounts in equipment/overhead and reducing the corporate environmental footprint. While it isn't suitable for all jobs, it's a fantastic small business alternative for jobs that can be done from a home office. Anything web-related, marketing, and even customer service is now easy to do remotely. You can also contract staff rather than hire in the traditional sense. Telus is a fine example of this workforce model.
Ricky M.
November 12, 2013 at 12:29 am
Very true! Employers should really place emphasis on the "hiring costs" which can slowly add up. You mentioned all the main points (recruitment, interviews, etc.). Training costs is the one that really stands out to me. Training each employee is important for every business and is a cost that should be focused on. Also agree with your points on "workspace costs" for each employee. Great article Roger! These costs should help business owners plan an effective budget!
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