I recently had an interesting discussion with a successful entrepreneur about the current trend amongst the small business community to outsource tasks and responsibilities, rather than hire employees and keep the work in-house, which is his preferred model.

It prompted me to ask him what his level of turnover was when he first took on a full-time employee to help him and his wife grow their business.

The answer surprised me. It was £15,000, and the year was 1985.

In 1985 the cost of posting your festive cards first class under the care of the Christmas pantomime genie was 17p.

So, assuming the economic power of £15,000 in 1985 has risen to around £60,000 in 2012, is this enough for you to take the plunge and employ staff?

I have revisited the costs of employment and find the employee ‘burden rate’, that is the cost to the employer in addition to the employee’s salary, can be as high as 60%. This is of course variable, mostly due to the range of employment benefits that might be packaged for the employee. But some, such as employer’s National Insurance, minimum holiday entitlement, sick pay, maternity and paternity leave, are non-negotiable.

Sample costs of employing a staff member on a salary of £30,000 per annum, 37 hour a week contract.

  • Base salary: £30,000 per annum.
  • Employer’s National Insurance contribution at 13.8%: £4,140 per annum.
  • Statutory Holiday Entitlement for full time employee (employers do not have to give public holidays as additional paid leave and can include these 8 days in the 28 days statutory holiday): 5 weeks and 3 days of lost productivity, while on holiday: £3,676.61 value per annum.
  • Unproductive hours (time lost when employees are on duty, but not working, due to coffee breaks, comfort breaks, chatting with colleagues, taking personal calls or reading/writing personal emails etc): 30-60 minutes per day of lost productivity when on duty: £1,710.93-3,421.87 per annum.
  • Discretionary bonuses and performance rewards etc.
  • Sick pay.
  • Maternity, paternity and adoption leave.
  • Payroll expenses.
  • Employer’s pension scheme costs and contributions, where appropriate.
  • Employer’s insurances.
  • Health insurance provision.
  • Provision of place of employment, heat, lighting, equipment and IT services and stationery.
  • Appropriate training.
  • Possible company car, or car allowance.
  • Provision of branded uniform or safety wear, where appropriate.
  • Childcare provision or vouchers if provided.
  • Any work-related travel or entertainment.
  • Free or subsidised refreshments and lunch facilities.

Some of these items are optional, and will depend on the type and size of business, but they soon add up.

When reviewing this list the average UK employment burden rate of 45-60% becomes credible, setting the total costs to the employer of hiring a £30,000 base salary employee at between £43,500 and £48,000.

It is possible to keep costs down by not providing any optional employee benefits, and driving staff like machines when on duty, but your employee engagement will suffer, and with it your sickness rates will increase and your productivity will decrease.

Of course there are many advantages to having your own employees, and I am only considering costs on this occasion.

The alternative is to outsource to freelance service providers. You pay the rate agreed for the work, either by day, half day, hourly or by project pricing. All overheads are carried by the service provider and are built in to these rates, so there will be no hidden costs. You only pay for the work undertaken, plus any agreed expenses, with none of the employment items on the list above becoming your concern (except perhaps, agreed travel costs, if required).

It is easier to contain costs, and is flexible to your requirements. Many business owners I speak to say they would not survive without their freelance team, who support the growth of their business.

So is an employee a burden or a bonus? And where is the tipping point? Please share your views below.