7 Costs of Hiring a New Employee for Your Small Business

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When hiring new employees, it’s important to consider all expenses involved. Here, we go through all the hiring costs involved in recruiting new employees.

The costs of hiring a new employee involve much more than just a salary. The hiring process includes many expenses that can quickly add up, especially when you take a full-cycle recruiting approach to hiring and recruiting new people.

Here, we explore the seven most common hiring costs, as well as tips to improve your employee retention rates, which, in turn, decrease long-term hiring costs.

Overview: What is the cost of hiring an employee?

The cost of hiring an employee includes all related expenses during the recruiting process, plus post-recruitment costs such as training and onboarding.

The final number for each business will vary considerably depending on:

  • Your industry
  • The level of the position you’re hiring for
  • Where your business is located
  • The time taken to fill the position

However, there are general fixed expenses that most businesses will incur when hiring a new employee, which we will go through in detail below.

The 7 most common hiring costs

Although you’ll have a rough idea of how much it will cost to hire your next employee, there are some costs you may not have factored into the total. Let’s take a closer look at what activities you can expect to spend money on during the hiring process.

1. Recruitment

Salary aside, recruitment costs will be one of the biggest hiring costs you’ll incur. Recruitment costs cover a host of expenses that you might not have considered, including:

  • Job board fees: Different job boards have different pricing models. Some operate on a pay-per-click basis (where you pay an amount for each job seeker that clicks on your post), while others let you post a certain number of jobs for a flat fee.
  • Recruiter costs: Whether you rely on in-house recruiting or external recruiters, their time and travel expenses (if applicable) will cost you money.
  • Resume screening: Manually screening resumes costs in terms of HR teams’ time.
  • Interviews: Phone, in-person, and remote video interviews cost in terms of the time spent interviewing multiple candidates.
  • Recruitment software: Recruitment and HR software is an upfront cost for businesses.
  • Recruitment events: Holding recruiting fairs will cost you in location, catering, and employee hours.

2. Pre-employment background checks

Background checks involve investigating various aspects of a candidate’s past, and though they’re not required by federal or state law, almost 95% of employers carry out at least one type of background check before hiring.

Some common employer background checks include:

  • Criminal background checks
  • Credit background checks
  • Drug testing
  • Identity verification
  • Professional license verification

3. Onboarding

Onboarding is a cost you’ll incur once you’ve successfully hired your new employee, but it’s still considered a hiring cost, even if you’re onboarding remote employees these days. Onboarding is an important part of engaging new employees and making sure you deliver them the tools to provide you with a strong return on investment (ROI) on your hiring costs. Onboarding costs include:

  • Orientation tasks: These include first-day lunches and/or coffees, tours of buildings, and more.
  • Form filling: You and your new employee will need to spend a decent amount of time filling out relevant paperwork during the first few days.
  • IT costs: Your IT department will need to create various logins and adjust systems for your new employee.
An example of The Motley Fool’s onboarding process, from the offer letter through the first 3-6 months on the job.

An example of The Motley Fool’s onboarding process, which details all of the onboarding tasks an employee can expect to complete. Image source: Author

4. Salary and employee benefits

Salary and employee benefits expenses will likely form the majority of your hiring costs. Depending on the types of benefits you offer, the level of contributions you make to health insurance premiums and retirement funds, and the base salary of the new position, your final costs will vary.

Employee benefits can also include items such as free coffee and snacks, tuition reimbursement, other medical and dental plans, and life insurance.

HR software solution Namely tracks key HR metrics to help you monitor how much you’re spending on benefits contributions to make sure you’re in line with necessary budgets.

Screenshot of Namely’s benefits deductions page, including medical, dental, basic life, and other line items.

Namely shows a breakdown of benefits deduction data for employees and employers. Image source: Author

5. Training

No, you can’t close your checkbook once your new employee has signed on the dotted line and been onboarded. Once they’ve been hired, you’ll need to spend time and money on training and development plans.

Though training can be expensive, it’s one of the most important investments you can make. A lack of well-thought-out training activities can lead to your new employee not delivering ROI and eventual turnover.

Here are some expenses involved in training a new employee:

  • Training materials and equipment: Depending on your industry, you might have to supply each new employee with training materials and equipment rather than reuse them.
  • Time spent training: Both the new employee and those training them will spend hours completing training, which is time spent not working.
  • Costs of training experts: Some businesses and industries require the help of external experts to help train new staff.

Tracking training costs and progress can be tricky, especially if you have a cohort of new employees. Zoho People lets users tie in both training costs and training metrics to performance management plans to help monitor overall expenses and their efficacy.

Screenshot of Zoho People’s training module, with courses, associated content, resources, and more.

Zoho People lets you provide and track training and monitor training costs from the same tool. Image source: Author

6. Equipment

Don’t forget to factor in the tools your new employee will need to do the job. Again, depending on your industry, the range of equipment you’ll need will differ. However, computers, software, phones, desks, and desk chairs are all commonplace items you’ll need if your company is office-based.

7. Employee referral costs

Many businesses use employee referral programs as a recruiting strategy to attract the best talent, and for good reason -- businesses are four times more likely to hire referrals from their own employees’ networks, and referrals have consistently been cited as the best source of hire.

But, taking advantage of the benefits of an employee referral program will also cost you money. Here are some of the costs involved in setting up, maintaining, and ultimately hiring via employee referral programs:

  • Development costs: Every company’s referral program will look different, but they do take time and money to set up. These costs include the hours your HR team spends setting up the program and monitoring its progress.
  • Employee referral software: Many HR and recruitment software solutions already include some form of employee referral module, but these may incur an extra “add-on” fee.
  • Employee referral bonuses: If you offer cash incentives to your employees for referring someone in their network, bonuses are arguably the most significant cost of employee referral programs. It’s up to you how much you offer, but generally speaking, bonuses will vary depending on the level of position you’re hiring for, e.g., $250 for an entry-level position and $1,000 for a more senior position.

Tips for employee retention to decrease hiring costs

Employee turnover costs businesses in time and money spent on the employees they lose and the new employees they need to hire to fill those spaces. Keeping turnover rates at a minimum helps reduce overall hiring costs.

Here are a few ways to keep employee retention rates high and hiring costs low:

Hire the right people

This sounds obvious, but many businesses have suffered the effects of a “bad hire.” Whether the role didn’t live up to the hire’s expectations, or the candidate wasn’t a fit for the position, hiring the wrong person costs businesses thousands in replacing them (replacing an existing position can cost up to $15,000).

Taking the time to create an accurate candidate profile will ensure that only the right people apply to the role. Plus, you need to be totally honest about what the role entails, which includes information about the company, job, and company culture.

Commit to effective onboarding practices

Onboarding is often seen as an initial task to be completed at the start of a new employee’s tenure -- not only to help them settle in and do their job effectively but to confirm that they made the right choice by choosing your company to work for.

However, we recommend engaging in continuous onboarding for all employees. Continuous onboarding is the practice of creating an ongoing onboarding plan for all of your employees, which includes training and development plans, career paths, and goals. This helps employees realize you are as invested in their development as you are in their day-to-day work.

Assess your employee benefits package

Benefits packages are extremely important to candidates when they are choosing a place to work, but they’re also important to existing employees.

Aspects of the job such as flexible working arrangements, vacation allowances, and fringe benefits are all important to consider when reviewing your benefits package. With the rise in remote working, you’ll also need to consider how to make meaningful adaptations to benefits packages to suit and please your employees.

Keeping hiring costs in mind

Remote working is becoming the norm, but the costs of hiring a new employee won’t disappear. New employees will still need training, equipment, and onboarding to help them settle into their new roles and set them up for success.

As your company grows, you’ll need to hire more employees. However, don’t forget about employee retention strategies that can help you reduce overall turnover and hiring costs.

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