The Cost of Employees

You're going to pay each new employee you hire at least the minimum wage required by law, and probably a little or a lot more than that. But there are several other costs associated with each employee. Some you can quantify and control, others you can't.

In addition to compensation, there are four types of expenses relating to employees. Two of these are, to some extent, within your control. These are:

Taxes. As an employer, you're responsible for your share of FICA and FUTA taxes imposed on each employee's income. Since these taxes are a fixed percentage of the compensation you pay, it's relatively easy to determine what the cost will be.
Benefits. To the extent that you provide employee benefits, you'll incur an incremental increase in benefit costs each time you hire an employee. Since there is such a wide variety of benefits, you'll have to consider each type to determine what the overall cost of benefits is. Items to consider include:
- Time off. If you give employees paid time off, you are effectively increasing the hourly rate that you're paying.
- Workers' compensation. Premiums vary based on the state your business is located in, the relative risks in your industry, and your actual experience. Nevertheless, at any point in time, it's relatively easy to determine what costs you'll incur for each additional employee.
- Business insurance. You may incur additional costs when, for example, you add another authorized driver for company vehicles. Other types of hazard insurance can increase incrementally as your business grows.
- Health care. This is one of the most costly benefits that employers choose to provide, and each employee means additional premiums. While the deductibility of premiums reduces the cost, it is still one of the larger expenses associated with employees.
- Retirement plans. Like health care, this can be one of the largest expenses you'll incur in addition to compensation.

The other two types of expenses are, unfortunately, not readily predictable. They are:

Administrative costs. Each time you hire or replace an employee, you incur certain administrative costs. Someone will be spending additional time acting as a supervisor, doing payroll, administering benefits, keeping records, or performing other activities that relate to maintaining your workforce. If it turns out that a new employee requires more supervision or instruction than your average employee, someone else in your company is going to have less time to do their job.
Contingent liabilities. These are the hidden risks that really can't be estimated with any degree of certainty. Costs generally result from:
- Employee's conduct. An employee may be involved in an accident, or otherwise injure a third party, who then seeks to hold the business responsible for the consequences. Your customers may seek to recover from you if, for example, an employee does a shoddy job.
- Employment-based actions. An employee may sue you for the workplace conduct of other employees, or for what he or she claims is a discriminatory employment action. Each new employee could wind up making a claim, or engaging in conduct that gives rise to a claim.

There isn't a lot you can do to protect yourself from these types of expenses, except to hire the best people you can and treat them in a nondiscriminatory factor. Nevertheless, it's an issue to think about.