What an employee really costs (and when you can afford to hire)
An employee costs far more than their wage. Add employer on-costs, a van, tools and kit, and the fact that only part of their paid time is billable, and the true cost is often 50% or more above the wage per hour worked. You can afford to hire when they can be billed out comfortably above that true cost, for enough hours, with a buffer for the quiet spells.
Hiring your first employee is one of the biggest leaps a trade business makes, and one of the easiest to get wrong on the numbers. Most people look at the wage, decide they can cover it, and take someone on. Then a few months in, the money is tighter than ever and they cannot work out why.
The reason is simple. The wage is only half of what an employee actually costs.
What an employee actually costs
On top of the wage you agree, you are also paying for:
- Employer on-costs — employer tax or national insurance, pension or superannuation, payroll levies.
- Kit and running costs — a van and fuel, tools, a phone, workwear, insurance, training.
- Paid time they are not working — holiday, sick days, training days. You pay for the full year, they work less of it.
Put together, these routinely add 30% to well over 50% on top of the wage. A hand on a $25 wage can easily cost your business $35 or more for every hour they actually work.
The billable hours trap
Then comes the part almost everyone forgets. Not every hour they work can be charged to a customer. Travel, loading up, tip runs, cleaning up, waiting on materials and the odd quiet afternoon all eat into it. If only about three quarters of their worked hours are billable, the cost you have to recover is squeezed into far fewer chargeable hours, and the real number climbs again.
How to work out the true cost
Take the all-in cost for the year and divide it by the hours you can actually bill. Here is the example built into the Cost of an Employee Calculator: someone on $25 an hour, 40 hours a week, 6 weeks off, 75% of their time billable, 15% on-costs and $6,000 of kit:
| Wage ($25 × 40 × 52) | $52,000 |
| Employer on-costs (15%) | $7,800 |
| Van, tools and kit | $6,000 |
| True cost a year | $65,800 |
| Billable hours (46 wks × 40 × 75%) | 1,380 hrs |
| True cost per billable hour | ≈ $48 |
So a $25 hand actually needs to earn you $48 for every billable hour just to break even. Charge their time out below that and every job they touch loses money.
What to charge them out at
Their true cost per billable hour is your floor. To make the hire worth the risk, you need to bill them out comfortably above it. Many trades charge a hire out at roughly two to three times their wage, but do not lean on a rule of thumb, work it out from your own figures. In the example, billing them at $60 an hour turns them into about $17,000 of profit a year. That is the difference between a hire that grows your business and one that quietly drains it.
So, can you afford to hire?
Knowing the cost is one thing. Affording it is another. Before you take someone on:
- Check you can keep them busy. The whole thing only works if their billable hours stay high. The cost is fixed, the work is not.
- Allow for ramp-up. Nobody is fully productive on day one. Budget a few slower months while they find their feet.
- Keep a buffer. You are taking on a fixed wage in a business with a lumpy income. Make sure a quiet month will not sink you.
- Do not hire to look busy. Hire because there is more good work than you can handle and the numbers stack up, not because it feels like the next step.
The mistakes you cannot charge for
Here is a cost that does not show up on any calculator, and it caught me out more than once. When an employee makes a mistake, or a job goes wrong on their watch, you cannot send the customer a bill to put it right. So you end up paying for it, twice.
Think about how that actually works. You pay them to go and do the job. The work goes out, and something is not right, a leak, a fitting not sitting flush, a finish the customer is not happy with. So you pay them a second time to go back and put it right, on your clock, often with materials on your account too. That is two lots of labour on a job the customer only paid for once, and the second visit is regularly longer than the first.
I learned this the hard way. I once sent someone out on a quick job that should have taken an hour. A day later the phone goes: there is a problem. Back he has to go, and what should have been an hour turns into three more to sort out. Four hours of paid labour on a job I had priced at one. Do that often enough, on thin margins, and it adds up terrifyingly fast. I did not allow for any of it, and it is one of the mistakes that helped tip me into bankruptcy before I turned thirty.
So build it in. When you are working out whether you can afford someone, assume a slice of their time, more while they are still learning, will go on putting things right rather than earning. Allow for it in your pricing too, whether that is a small buffer in every quote or a slightly higher charge-out rate. Leave it out and one bad week of do-overs can swallow the profit from a good month.
Frequently asked questions
How much does an employee cost above their wage?
How do I know if I can afford to hire?
What should I charge an employee out at?
Is it cheaper to use a subcontractor instead?
The takeaway
A wage is a fraction of what a hire costs, and the true number is the one you need before you commit. Work it out, make sure you can bill them out well above it with room to spare, and only then make the leap. Get that right and your first hire is the best money you ever spend.