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Home > Human and Intellectual Capital Checklists > Understanding the Financial Aspects of Employing People

Human and Intellectual Capital Checklists

Understanding the Financial Aspects of Employing People


Checklist Description

This checklist examines the various financial aspects of hiring staff and their implications for a company.

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Definition

The financial aspects of hiring an employee go far beyond the visible cost of paying them a salary. There are many factors and hidden costs that need to be taken into account. National and international legislation also determine a company’s financial obligations to an employee to a certain extent. Thus, the true cost of hiring a worker will be more than the agreed wage, and the additional costs need to be budgeted for in the accounts.

Apart from the salary, an employer pays additional up-front costs for items such as the employer’s portion of the social security and pension contributions. In many countries employers also have a legal obligation to pay holiday pay and sickness benefit contributions, as well as collecting taxes for the government and paying tax credits to an employee where there is entitlement. Where women of child-bearing age are employed, there is also the cost of maternity leave to consider, the length of which depends on national laws; companies can usually claw most of this back from the government to cover the cost of hiring a temporary replacement. Other legislative issues to consider include matters such as a legal minimum wage and, in some countries, such as the United Kingdom, companies have to meet the cost of running checks to ensure they are not hiring illegal immigrants.

Particularly in the European Union, many countries have employment protection legislation in place, making it difficult for companies to fire staff with little or no notice. Companies therefore need to budget for funds to cover periods when they may need to downsize quickly to reduce costs. Garden leave, where an employee is paid to stay at home instead of working out their notice, is another expense that may need to be covered.

Other staffing costs that need to be budgeted for include items such as training (whether one-off or regular sessions), insurance relating to safety in the workplace, and pay rises. Companies seeking the best staff may wish to offer perks such as private health insurance, travel subsidies to and from the workplace, childcare allowances, and extras such as gym memberships. In very large corporations it is also becoming common practice to use a golden parachute clause in the employment contract. This ensures that an employee will receive certain major benefits if employment is terminated, typically including severance pay, cash bonuses, and share options.

On top of all these costs, there is the additional cost of administration. Whereas small firms often outsource payroll administration, large companies typically have qualified payroll accountants working in-house, as well as a human resources department to handle all the related issues.

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Action Checklist

  • Have in place accountants experienced in payroll budgeting.

  • Hire or outsource to qualified HR staff who are experienced in the legal and financial aspects of employing staff.

  • Develop a long-term strategy for hiring staff as the business expands or, in some cases, downsizes.

  • Ensure that you have considered and budgeted for all possible scenarios when calculating the salaries you will offer.

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Dos and Don’ts

Do

  • Familiarize yourself with the legal requirements in your country.

  • Look at tax breaks that are sometimes offered for hiring certain kinds of staff.

  • Budget for unexpected costs such as several resignations happening at once, or the costs arising from a legal dispute over the terms of a contract.

Don’t

  • Don’t try to cut legal corners—the penalties are usually severe.

  • Don’t forget that even advertising for staff is a cost you need to account for.

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Further reading

Books:

  • Ashenfelter, Orley C., and Richard Layard (eds). Handbook of Labor Economics. Amsterdam: Elsevier/North-Holland, 1986.
  • Blundell, Richard, and Thomas MaCurdy. “Labour supply.” In Durlauf, Steven N., and Lawrence E. Blume (eds). The New Palgrave Dictionary of Economics. 2nd ed. Basingstoke, UK: Palgrave Macmillan, 2008. (Dictionary online at: www.dictionaryofeconomics.com/dictionary).
  • Stone, Raymond J. Human Resource Management. 8th ed. Milton, Australia: Wiley, 2013.

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