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Making the Decision to Hire: Balancing Financial Considerations and Business Needs

Filed under Hiring Workers. Fact checked on May 24, 2012.

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Making the decision to hire workers for your business is a big step that involves determining whether it's cost-efficient to hire someone and then deciding what type of help you need. Hiring full-time or part-time employees, hiring your children, hiring temporary help or perhaps using leased employees or independent contractors in your business are among your options.

For some businesses, workers are a necessity. For others, the decision is not as clear cut. Whether you're a small business owner just starting out or have grown your business to to the point where the work is too much for a one-person operation, you may find yourself toying with the idea of adding staff to help out. But even if you determine that you need the extra help, what kind of help, if any, can you afford?

Doing the Math

How do you know how much you can afford to pay? Look at your operating budget. How much slack is there in it? How much money could be cut from other areas, so you could use it to pay an extra person? If you're considering hiring an employee, particularly a full-time one, don't forget to consider the minimum wage, payroll tax, required benefits, and workers' compensation implications.

There's an obvious tension between how much a worker's cost will drain your business's budget and how much extra money the worker's presence will bring in. Try to estimate how much extra income that worker would generate in the first year. This is not always easy to do. If the worker is going to sell your product or services, it will be easier to figure out how much extra income he or she would bring in than if the person is going to perform data entry or cashier duties.

What if there is an absence of a "cause and effect" relationship? Consider other ways that bringing in help could generate more income:

  • Would you have more time to market your services and expand your business?
  • Would it allow you a chance to produce more products or serve more clients?
  • Would you be able to give your customers more efficient service or quicker delivery, with the result that higher quality would lead to more customers?

If the answer is "yes" to any of these, try to estimate how much extra business would be generated by more, faster, and better delivery of your product or service.

Work Smart

Small business owners wear many hats and the thought of easing the demands on your time by hiring a worker is tempting. It's natural to assume that once you've got someone to help out, you'll have all this extra time, right? Well, maybe. But don't forget, when you hire someone — especially when you hire for the first time — you have to invest a lot of time in the hiring process, in training the worker to get them up to speed, and in managing records and other responsibilities as an employer.

You may want to ask yourself if you really need to hire someone or just be better organized. If you're having trouble getting organized, try taking a time management seminar, and maybe you'll find the solution to your workload problem.

If you're fairly sure that the extra business would amount to more than the cost of a worker, then you are in a good position to hire someone.

What if, according to your calculations, the added business does not outweigh the what you would have to pay to add staff? If you're still sold on the idea of getting someone to take over some of your work, then look for other alternatives to hiring a permanent full-time employee. Hiring a part-time employee, hiring your children to work in your business, or using temporary help may be affordable staffing options. Leased workers and independent contractors may also fulfill your staffing needs without the cost and hassle of hiring an employee. And if you're willing to get creative, there are very effective little to no-cost staffing methods that can meet your needs.

Hiring Full-Time Employees

There are several advantages to hiring full-time staff. Because most people work only one full-time job, you are more likely to have control over the employee's time and to get increased employee loyalty from a full-time worker. You may have the peace of mind that there will be someone around to "mind the store" in your absence. You may also be looking ahead to the day when you want to sell your business, and full-time employees who already know the ropes make excellent buyers.

For some, however, the disadvantages far outweigh the advantages. Just look at the burden of computing payroll taxes and staying atop the federal and state employment laws. Often, full-time employees receive benefits such as health insurance and paid vacation. Will you have to provide these types of benefits to be competitive? Can you realistically afford a full-time employee?

Keep in mind too, that even if you hire an employee for what you believe isn't a full-time position, the legal interpretation of full-time may vary from yours.

Defining the full-time worker. Don't assume that an employee must work a 40-hour week to qualify as full-time. The definition of "full-time" varies, depending on which law is involved. However, you may be surprised to learn that in many cases a person who works at least 30 hours a week (1,500 hours a year) will be considered full-time. And for some benefit entitlement purposes, a person who works at least 75 percent of the average number of hours that are customary for an employee in that particular position is considered your full-time employee.

Example

The Craving Coffee Corporation hires a leased employee, Beth Beans to perform services as a taste tester. It is customary for taste testers who are employed by Craving Coffee to perform services 37 hours per week or 1,924 hours per year. During the next consecutive 12-month period, Beth performs 1,475 hours of services for Craving Coffee. Beth does not meet the first leg of the test for being employed on a substantial full-time basis because she did not perform 1,500 hours of service. However, Beth does meet the second test for full-time service because she performed services for a number of hours equal to at least 75 percent of the number of hours that are customarily worked by an employee in that particular position (.75 x 1924 hours = 1443 hours customarily performed). Therefore, Beth is a full-time employee of Craving Coffee for retirement plan contribution purposes.

This situation becomes especially significant if Craving Coffee has other full-time employees who receive benefits. Because Beth qualifies as a full-time employee, she may become entitled to benefits also.

Meeting Your Staffing Needs By Hiring Part-Time Workers or Your Children

If you like the idea of hiring an employee but think that hiring full-time help would be overkill, consider hiring employees on a part-time basis.

Hiring Part-Time Employees

Part-time employees can be a great compromise between full-time employees and non-employee staffing solutions. They allow employers to have control over the employees' work, but generally they cost less because these people work fewer hours and, as a rule, don't get as many costly benefits as full-time employees.

In some cases you can hire part-time hourly workers and ask them to work more or fewer hours in any given week, depending on how much work you happen to have.

Of course, part-time employees may have full-time jobs elsewhere, so employee loyalty may be sacrificed. Part-time employees may also tend to leave your business if an offer of full-time employment comes along, so you may end up with an employee turnover problem.

Keep in mind, too, part-time employees are still counted as employees for purposes of determining liability under anti-discrimination laws.

Bigger pool of possible employees. Another advantage of offering part-time employment is that it may open up a wider array of possible employees for you to choose from. Students and retirees are only two of the groups that are more likely to be able to work for you if you offer part-time employment. Make the hours flexible and you may also attract individuals with children and others who may have to work on an irregular schedule.

If an employee/employer relationship is not what you want, you can consider other alternative staffing measures such as temporary help, independent contractors, or leased workers.

Hiring Your Children

Without getting into the family relationship issues involved in hiring your children, there are other factors to consider in making a hiring decision:

  • Tax breaks. If you hire your children to work in your business, either full-time or part-time, you could be eligible for special tax breaks.

    The tax break is an exemption from the requirement to withhold FICA, or Social Security taxes, from your child's paychecks. Normally, a business pays 7.65 percent of each employee's salary in Social Security and Medicare taxes and withholds another 7.65 percent from the employee for the employee's share of those taxes. By not paying or withholding FICA from your child's paycheck, you save 15.3 percent.
Example

If Lucy hires her son Ricky to work 12 hours per week at $7.25 an hour, she'll save about $692.17 over the course of the year (12 x 52 x $7.25 x .153).

  • Child labor laws. Child labor restrictions usually don't apply to hiring your own children. There are both federal and state laws that pertain to employing children. Generally, employing a child under the age of 16 is a violation of federal law although there are certain exceptions carved out for employing children aged 14 and 15.

    However, the general rule that no child under the age of 16 years may be employed in any nonagricultural occupation does not apply to the employment of a child by a parent as long as the job is not in manufacturing, mining, or any other hazardous occupation as defined by the Department of Labor.

Temporary Help May Be a Viable Staffing Solution

Traditionally, temporary help has been useful when you need a replacement for a full-time employee who is away from work for vacation, leave of absence, or illness. But temporary help may be what you need to fill your more long-term needs. The following are some of the advantages of using temporary workers:

  • Cost. You may save on payroll administration and fringe benefits costs.
  • Time. You can use a temporary agency to recruit the employees and send you people with the qualifications you specify. Some agencies may even train workers; for example, they may teach them to use common word-processing or spreadsheet programs.
  • No long-term commitment. If you're not sure whether you have enough work to keep a full-time employee busy, try a temp and find out.
  • Less dependency on contractors. You may feel uncomfortable being dependent on non-employees if large segments of your business are farmed out to independent contractors, and temps may cost less than contractors. With a temp, you do have the power to directly supervise the employee's work.
  • Possibility of hiring good temps, permanently. If a particular temp worker seems to fit well into your business, you can always offer to hire him or her as a permanent employee. In this case, you avoid the risks of a probationary period you'd normally have with a new hire.

While temporary employees do seem like a great option, they are not without their disadvantages, including:

  • Legal compliance issues. While some businesses may think that hiring temporaries gets them out of having to comply with employment laws, that's not always the case. There have been instances where temporary help agencies and the businesses where the temporary help worked were involved in discrimination cases. Be aware that an employer can't avoid providing benefits or complying with other employment rules by incorrectly classifying an employee as a temporary employee. It will be a government agency (tax, pension, benefits, etc.) making the call if there's a chance you're abusing the temporary employee designation to avoid your obligations to employees who aren't temps.
  • Morale issues. Many businesses use what they call temporary employees just as they would permanent employees, except that the temps don't receive the normal fringe benefits that permanent employees receive. When you have temps who work 40 hours per week for months alongside permanent employees who are receiving the benefits associated with full-time employment, it can create employee relations or morale problems.
  • Compatibility. Not all jobs and businesses lend themselves to using temporary workers, either because the job requires a high or specialized level of skill or, in some rare cases, because of union constraints.

So how do you go about getting temporary help? Well, you can either hire temporary workers on your own, using some standard recruiting methods such as advertising, or you can use a temporary help agency. Recruiting temporary workers on your own can be tricky. Try to target people who really want temporary work and not those who really want a permanent position and only take temporary positions hoping that they will develop into permanent employment.

Tools to Use

If you do decide to use a temporary agency, the Business Tools contain a checklist to help you screen an agency.

When using a temporary help agency, you must realize that you're going to pay more for the convenience of having someone else do the legwork. For example, for a worker who gets $10.00 per hour in pay from the agency, you may actually pay $12.00 or $13.00 per hour for that employee. Nevertheless, for short-term projects or situations where the worker will need a lot of supervision (for example, receptionists, secretaries, administrative assistants), temp agencies are a great alternative.

Work Smart

Consider other options (such as independent contractors or part-time employees) for long-term projects — it may end up being cheaper.

When using temp agencies, be sure to structure contracts in such a way that your liability is minimal. And be sure to choose a reputable agency!

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