The cost of an employee is defined by more than just the salary or hourly pay rate. Recruiters should be in a position to clarify to their clients the factors that comprise the true cost of an employee and to assist them with deciding on direct hire or contract placements. Tangible direct-hire employee costs include payroll, benefits (including healthcare, unemployment, workers’ comp, dental, vision, and retirement packages), matching employer taxes, and indirect costs such as vacation pay, parental leave, optional bonuses, and the administrative overhead burden posed by the employee. Tangible contract employee costs, by comparison, are simply the bill rate times the number of hours worked. All of the tangible direct-hire components mentioned above are included in the bill rate. There are intangible costs as well for direct hires, such as the risk of a bad hire. While difficult to quantify, there is a real cost to a bad hire, a cost which may be avoided by use of contract or contract-to-hire personnel.

QuickBooks notes that you can “calculate an employee’s labor cost per hour by adding their gross wages to the total cost of related expenses including annual payroll taxes and annual overhead.” A useful hiring cost rule of thumb is that the annual cost of an employee is typically 1.25 to 1.4 times the base salary. An example for someone to whom you pay a salary of $100,000 would be a true employee cost of from $125,000 to $140,000 with the cost varying from state to state and according to their position. Support for this approximation is provided by the Bureau of Labor Statistic’s estimate that about 1.3 times the base salary is a representative figure for the true cost of a direct-hire employee.

The cost of a contractor or a contract-to-direct hire is simply the bill rate negotiated by the recruiter. If self-funded, the rate is determined by the sum of the employee pay rate plus the recruiter’s markup to cover the payroll burden which includes taxes, insurance, and the cost of the money. If you use an employer-of-record provider, their fee would encompass all of these expenses. Recruiter profit would be based on bill rate minus pay rate minus the employer-of-record service fee. An advantage of offering contract employees is that the client company is relieved of the overhead and burden of administering the employee. The client company is also insulated from unemployment and Workers Comp claims. The US Department of Labor notes that the average cost of a bad hire is at least 30% of the individual’s first-year expected earnings. The cost is not just monetary, but also adversely affects production, wastes time for supervisors, and demoralizes existing staff.

When your client company is concerned about budget constraints, offer contract labor as an alternative or as a solution. Contract labor gives the client company flexibility in staffing while avoiding the cost of a bad hire. Leave the option open for direct hire after 60 to 90 days if the candidate is a good fit for the job. You can earn a “conversion fee” which would equal your regular direct hire fee minus any profit you have earned while the contractor was on assignment. If the applicant does not work out there is no further cost to your client company. The use of contract labor also allows the client company to adjust for trends in the marketplace.

Partner with an employer-of-record service provider to enable you to offer these solutions. They will keep up with the requirements of the regulatory jurisdictions, so you do not have to. If you are set up in advance, you can provide services to your client companies at once. You can help your clients navigate the costs of hiring if you KNOW YOUR HIRING COST RULE OF THUMB.

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