5 big questions to ask before taking on your first employee

Here’s a closer look at what you need to consider before leaping from being a sole trader to being responsible for somebody else’s livelihood

Taking on that first employee can seem an enormous step but it’s also a huge opportunity to grow your business beyond the limitations imposed by being a one man or woman band.

As an individual you can only do so much. Even if you work 12 or 14 hours a day, you will eventually hit a point where you’re turning work away. Take on employees, however, and you can not only produce or do more, but can also take on different roles and organise work to get things done more efficiently.

But it’s undoubtedly a step change. Those who work alone – either as sole traders or in limited company structures – have responsibility only for themselves. If business is good, they can pay themselves a little more or take less if sales turn down. Take on an employee and you have responsibility for wages, tax and National Insurance every month.

So before becoming an employer it’s vital to answer some big questions.

1. How will an employee help me make money?

This is the most fundamental question. An employee instantly adds to your running costs, so it’s vital to understand how and why your new person will help the business to make more money.

Sharing the workload. At the most basic level, once you employ other people you can serve more customers and therefore make more money. In a typical scenario, a sole trader finds himself or herself working 12 hours a day and turning customers away, so hires an assistant to take on some of the workload. Consequently you have two mechanics or accountants working instead of one. The work gets done. Problem solved.

Freeing you up to win more business. The extra time you have is great on its own, but the real benefits kick in when you begin to hand out different roles within your business. This can work in different ways. For instance, if you have been doing all the hands-on work for customers, bringing in an additional person not only enables more work to be done but also gives you a few extra hours every day to market the service more aggressively, ultimately bringing in more work.

Giving people specific tasks. Equally bringing in one or more employees enables you to create more efficient processes by dividing up labour. You see this on production lines but also in coffee shops – where taking orders, preparing coffee and taking money is given to individuals to improve productivity. Your scope to create more efficient processes may be limited initially but over time you will probably be looking at a more structured set-up to cover sales, service, account handling and production for greater efficiency.

So the key to making a decision on whether or not to take on an employee is to have a clear plan for how you will use the new person and the benefits they will bring. Once you know that you can begin to build the business case by balancing the costs against the projected contribution an employee will make. It’s also important to research the market. Will there be enough customers to justify your investment?

2. How do I know how much to pay them?

At the unskilled end of the employment market the absolute floor is the Minimum Wage – currently standing at £6.70 – for adults – but you will need consider the new National Living Wage. This is calculated on the basis of the local cost of housing, transport and food, and will start at £7.20 an hour from April 2016 – rising to £9 an hour by 2020 for people aged 25 and older.

However, for every role you will have to look at the local ‘going rate’. This is really just a guide. If unemployment is high in a particular area you may be able to pay a little less than the going rate (which runs the risk of employees leaving when they get the chance) but if you’re in a competitive labour market you may have to pitch higher or offer incentives such as flexible working.

The key is to do your research. If you’re looking for sales people, use adverts in local and national newspapers to find out what other businesses are offering. Some big employment agencies also post salary guides (by region and sector skillsets) on their websites. As you employ people over time, you’ll also be able to use the interview process to get a feel for employee expectations. Networking with other businesses is also useful.

3. How will I find time to manage an employee?

This is a question that becomes more pressing as a company grows. When you take on an employee for the first time, you will inevitably have to factor in some management time – not least for training in the first instance. However, in many cases a new employee will also free up time by doing work that you were previously undertaking.

That said, simply running a business eats up time and if you are no longer doing ground work such as taking orders you may well find yourself in demand for other things, such as sorting out customer problems or marketing. So it’s important to set aside management time, including all the administrative work involved in taking on an employee.

4. What are my responsibilities towards the employee?

There are some basics. All employees are entitled to (and must receive) written details of the job and statement of terms and conditions. And if the job is for more than a month the new team member must also receive and sign a written statement of employment, containing:

  • A job description
  • Details of where the employee will work
  • Hours
  • Overtime requirement
  • Holiday entitlements
  • Workplace pensions
  • And, notice periods.

Employees should also be given information on issues such as disciplinary action, and sick pay procedures, although these do not need to be in the contract itself. The Department of Work and Pensions provides templates for these documents, although small businesses often use forms available from online HR agencies or they outsource to specialists.

In addition you will also need employee liability insurance to cover accidents on site.

5. How do you process payroll?

On the face of it this is one of the most daunting aspects of becoming an employer as you will be responsible for not only paying the employee but also administering deductions and passing on information and money to HMRC.

Thankfully this task can either be outsourced or (as is increasingly the case) carried out using online tools that will do the monthly or weekly calculations while also compiling information for an annual tax report. Remember also that you should budget for employers’ tax and National Insurance.

As well as offering a system to record employee details, payroll software enables you to keep track of hours worked and calculates the salary due, while withholding deductions for tax. Other deductions, such as a season ticket loan or Cycle to Work scheme repayments, and contributions, such as pension payments, sick pay or maternity and paternity leave pay, can easily be factored in, making reporting payroll information to HMRC less of a chore. And finally, some products can help keep you on top of the latest legislation, print payslips, as well as providing telephone or online support to deal with queries.

Taking on an employee is not something to be undertaken lightly and there is an element of risk in committing yourself to paying salaries, plus more administration. But always remember that your employees should not represent a cost. Individually and collectively they will help your business make more money than it possibly could as a one-person-band.

This article was produced in association with online business software specialists Sage as part of a series of features on start-up essentials.

Other features in the series:
6 ways to cut costs and save time with business apps
6 numbers every business owner needs at their fingertips

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