Becoming an Employer

Date: 14th July 2022  |  Author: Sean Toomer

Taking on the first member of your team is a massive step for your little business – maybe even bigger than deciding to start it in the first place! Follow these tips to make sure you stand the best chance of getting it right.

OK, so you’re at the point in your small business where you’ve realised you can’t do everything, all the time, at the time it needs to be done. You’ve outsourced, and you’ve still got gaps. You’ve decided (or almost decided), you need to hire someone.

Where do you start with taking on employees?

First, what are they going to do? 9 times out of 10, it’ll be the core ‘thing’ you do, so you can focus on other areas, like building the business. By ‘thing’ I mean, if you’re building websites, the most logical thing to do is hire someone who is going to build websites. If you’re a videographer, you’ll probably want someone who can shoot and/or edit videos. If you’re selling products through an ecommerce website, it’ll probably be managing & packaging orders.

Expertise, or train them yourself?

Next, you’ll need to consider how good they are.

If you hire someone who is already really good, you’ll have a lot more free time, but you’ll need to pay them more.

If you hire someone who is still training, or an apprentice, it’ll be much cheaper, but you’ll need to devote a lot of time training them, teaching them even basic things about working life – which will result in them costing you perhaps more as your time is so valuable.

This will depend on your budget, and how much you have available to pay them.

Personally, my advice is to hire someone more valuable, with more expertise, which will cost more, but it means you can immediately remove yourself from a large chunk of the business and work on growing it more.

I’d say do this, even if it means waiting until you can afford it.

Usually, when it comes to small businesses owners hiring their first employee, they go for the cheaper option of an apprentice, or trainee, because they only see the risk in cash terms. What they don’t realise is the cash terms of their time spent on training them, which more often than not causes you even more stress and headaches and doesn’t solve the problem you had in the first place!

Hiring process

Now you need to consider where to find your first star employee.

If you’re going the route of an apprentice or trainee, you might want to consider local colleges. You can contact them directly with the job opportunity you have, which can result in a cheap and easy way to get some decent candidates in front of you.

If you’re looking for an employee more experienced, you can have a go at Indeed, or LinkedIn, and other social media sites.

Or, if it’s something really specific, and you’ve got the budget, you can get in touch with a recruitment agency. Be warned, this can be a very expensive route, and usually small businesses don’t have the budget, particularly if it’s their first employee. Rates for some recruitment companies can be as high as 20% of their annual salary. Yes, that high. No wonder they all drive a Porsche.

The Interview Process

Interviews are horrible, from both sides. I find it incredibly difficult to get to know someone well enough to decide to spend a vast amount of time with them from just an interview.

The way I treat the interview process is to get to know the candidate as much as possible on a personal level. I don’t mean what pets and how many siblings they have, more a sense of their character, what their interests and passions are and where they want to be in the future.

Most of what you’d want to know in terms of how they can do the actual job, you can most likely gain from their CV, references, or even by asking them for a competency test (Indeed includes these for you).

I always treat the interview as just a simple chat, to get to know them, and I tell them this at the start – usually with breaking the ice of telling them straight off that I’m terrible at interviews!

The best ‘hack’ I’ve come up with for identifying that a potential employee is actually any good at the job, is by following up the interview with a list of questions that I’ve come up with myself, that are very job specific, and can’t easily be Google’d (without confusing them).

Things like ‘what is an EYU and how do you submit one’?

Even a Google search of that can be confusing, but if you’re an accountant with the right experience to be working with us, you’d know the answer.

Offering a job

Once you’ve decided on the right candidate, you need to offer them the job. This can be a formal letter, or even just an email, but It should contain the most important bits of information:

  • Salary
  • Working Hours
  • Job Title
  • Job Description
  • Holiday/sick pay
  • Start Date
  • Indication of any probation period
  • Instructions on what to do next – with a deadline

The probation period can be up to you – usually 3 months, and it’s kind of like a courting period before you get married. It’s a chance for both of you to get to know each other and make sure it’s the right fit. If not, it’s your get out of jail free card to let them go should it not be the right fit.

Contract of Employment

Once your new team member is onboard, and they’ve accepted your offer (yay!), you now need to send them a bunch of legal stuff which they’ll barely read and then sign to make it official.

One of those will be the contract of employment, which is a fairly important document. It sets out the relationship between you and your employee; what is expected of you and what you expect of them.

You might be tempted to skimp on this and make it up yourself, or get a freebie document on the internet. I’d say don’t. Think of the contract of employment as your safety net, as the employer. There are a ton of laws out there to protect employees (as there should be), but not a lot to protect the employer – that’s what a contract of employment does.

If it’s a simple job role, you can most likely get by with a contract of employment template, which you can get in places such as the FSB, or a friendly HR business might have a free template online to download – just make sure it’s a reputable source. If it’s a more important role, I would absolutely advise you get a HR specialist or employment lawyer to put one together for you.

Restrictive Covenant

One of the areas within the contract of employment, which isn’t very well known and might be of incredible importance to you, is a restrictive covenant. Although it sounds fancy, one of these basically stops your employees doing certain things once their employment ends, for a period of time. For example, if they are client facing, you might want to include one that stops them making contact with your existing clients – so they can’t steal them away from you.

What to pay them

Pay peanuts, get monkeys. You’ve heard that before, because it’s true.

One thing I can tell you is that none of your employees will share your passion, determination, or ambition to make the business succeed. I’ve seen too often small business owners who look for another version of themselves, who they expect to put in the same amount of work as they do, for very little pay.

You won’t find them.

Whatever level of employee you take on, you need to at least pay them fairly. To find out, search the job role on Indeed in order to get an idea of salary level. Also don’t be afraid to ask during the interview what they are earning now, and what they expect to earn.

If it’s a trainee, in my experience, they’ll say yes to your offer of pay, they would have already decided on the job application, kind of like buying a mars bar – they won’t even consider negotiation.

For a higher level employee, they’ll most likely expect the given salary to be within a range (whether you’ve stated so or not), so will be more prepared to ‘haggle’, so keep this in mind.

Taxes, NI & Payroll

How much does it actually cost to take on an employee in taxes and stuff?

In terms of Income Tax and National Insurance, if you pay someone less than the personal allowance (currently £12,570), there will be no tax and no NI to pay.

When someone earns above this level, you’ll be required to deduct 20% Income Tax and 13.25% National Insurance. Once your employees reach the higher rate (total earnings above £50,270), Income Tax jumps to 40% above this amount (not on all of their pay).

The good news is, this is a cost to the employee, and comes out of their pay – you work it out, deduct it from their gross pay, and then pay HMRC the tax & NI and pay the employee what’s left.

The actual cost to you is Employer NI. This is at 15.05% above £9,100 per year. However, the first £5k you can most likely not pay with the Employer NI allowance.

Look, I know I’ve probably lost you here, and you’re thinking, how on earth am I supposed to work this out?

You don’t.

You have payroll software that does it for you, which, if you want to do yourself, you won’t have a good time. Instead, get an accountant to do it. It’s usually pretty cheap and most charge per head (e.g. £5 per payslip).

What you do need to do is work out how much it’s actually going to cost you to employ someone.

To do so, I always recommend you take their Gross Salary (which will include their tax & employee NI), and then add 15.05% to it to account for the employer NI you need to pay. It’ll be a higher estimate than needed, but it’s better to overestimate than be caught short.

Pensions

Thanks to the recent government, you now also have to provide your eligible employees (those who earn enough) a pension. This is at the minimum rate of 5% for the employee (that they pay/you deduct from their salary), and 3% for you as the employer.

We usually recommend a simple pension provider, like NEST.

Again, to factor in the true cost of what it’s going to cost to take on an employee, add 3% of their gross salary as employer pension that you’ll need to pay.

Insurance, HR & other legal stuff

One thing you’ll definitely need now you’ve taken on staff is Employer Liability Insurance. Don’t worry, it’s fairly cheap (little as a few quid a month). Either add it to an existing policy you have (for example if you have public liability or professional indemnity), or use an online company such as Simply Business for a cheap deal.

Another thing you may want to consider is HR advice/support. It may not be needed, but if you have an issue with one of your team, such as long-term sick, grievance, misconduct, maternity leave, complaints because you’ve run out of coffee, and many, many more, you’ll quickly find yourself in a realm where you have no idea what you’re doing.

Other Benefits

Something you might want to consider, to make your business more attractive to decent talent is other benefits you can give your team. Think about them carefully, and the cost implications of them.

In my opinion, free snacks, ping pong tables, and bean bag chairs are not a benefit, and a decent employee won’t be interested in them as much as their salary, or the company direction/ethos. They may contribute to the culture, but they are just a fad, especially if they are in place of real benefits.

Also, there is no point trying to list legal requirements as a benefit. I’ve seen employers say ‘sick pay, holiday pay, plus pension’ as a benefit. This is NOT a benefit – it is a legal requirement.

Some ‘proper’ benefits you might want to consider, particularly if you’re trying to obtain a decent culture for your business could include:

  • Private Medical Insurance
  • Company Car
  • Flexible working/work from home
  • Additional Holiday (above 28 days standard)
  • Unlimited Holiday
  • Duvet Days
  • Birthdays off
  • Gym membership

And many more. However, one thing you need to be aware of is that if there is a cost to a benefit (you have to pay something), such as a gym membership, company car, or private medical, it’ll usually mean the employee has to pay additional tax to have that benefit.

What if it all goes wrong?

Look, sometimes you can have the perfect interview, what you consider to be your dream employee, with the perfect fit, and they are happy with the salary and culture etc. and then it just doesn’t work, for lots of reasons internally and externally.

And that’s why you have a contract of employment, and hopefully a probationary period – so it’s easy to get rid of them if need be.

That might sound brutal, but as a small business owner, there is a lot riding on your first hire. My advice would always be to hire slow, fire fast.

If it makes you feel better, be aware that if your employee feels the same, they probably won’t hesitate to leave either!

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