Column: ASK Score, by Dean Swanson

One of the most common questions that I get from small businesses that are wanting to lower their cost for employees is should I hire employees or should I use an independent contractor?

The first answer to this question is that sometimes, the business doesn’t have any choice; the IRS guidelines mandate that you treat the worker as an employee if you meet certain criteria. (You can learn how to classify employees and contractors at the IRS website www.irs.gov.)

Consider this recent client case. Margo (a made up name because all of our SCORE counseling is confidential) wanted to bring her retail business online. She needed someone to create and manage a website and she determined the work should take about 120 hours a month. She didn’t know whether to hire an employee to do this at $12 an hour (for a total of $1,440 in wages per month), or to hire an independent contractor who will charge $2,000 a month for the job.

Here is a test for you. What would you recommend?

First, start with the variables that she needs to consider? One of the first considerations is the task that Margo needs to have done. She needed to put together a job description that identified exactly what she wanted the worker to do, what type of site is needed along with what functions.

Does the $12 an hour employee have the expertise to do what has to be done. It’s not just development of a site. There are millions of websites that are no good because they’re hard to open, too tough to navigate, etc, Margo’s focus needs to be the development of a website that meets all of her requirements.

The next question to ask is will Margo be directing this person? And if so, what level of expertise does she have to direct this?

Third question, if Margo hires the $12 an hour employee, does she have any idea what it costs to bring that person up to speed? Some companies have found that it costs up to $25,000 to bring an employee up to speed.

Another consideration is what really does the employee cost It’s not just the $12. The benefit package, even the minimum that the government requires for FICA employer match will bring the salary at least to $13.80 per hour and could easily approach $15 an hour with certain options. In other words, even if Margo stuck to the 120 hours with her employee, the salary costs alone could be between $1,800 and $2,400.

As this case demonstrates, there are many variables at play when choosing what type of worker to hire and comparing the associated costs. In this case, Margo may be best advised to hire the experienced outside independent contractor.

Here are some other things to consider if you’re trying to lower staffing expenses:

• Examine sales and productivity on an hour by hour basis to determine the best staffing level needed.

• Would your business be a fit for paying wages based on value? Most experts agree that it’s best to pay employees based on their value to your business not based on a set rate for all employees. In other words, always reward the most productive, valuable employees.

• Calculate the “up and running” time. Unlike an employee, who may need training and guidance from you, an independent contractor is likely to have enough experience to jump right into a difficult project.

• Avoid hiring employees when possible if the IRS checklist shows that your situation qualifies. You will save a lot of paperwork, rules and time.

• Consider mixing temps and full-timers. But, the key in doing this is to identify your potential stars and make sure you’re promoting and giving them more responsibility.

Then you can keep costs down by bringing in temp people for much of the other work. In my experience hiring a temp worker doesn’t mean that the people are not as qualified or as good. Sometimes the temp people are highly qualified people who only want to work 20 or 30 hours. Often temps turn out be really quite dependable and reliable. They just want to work less hours.

 

Dean L. Swanson is a volunteer SCORE Mentor and district director for SCORE Minnesota.