Cost of Hiring an Employee: 15 Areas To Consider

The cost of hiring an employee includes more than just a new employee’s salary. While labor is typically a company’s largest expense, the actual financial impact of hiring includes job advertisements, your recruitment staff’s salary and collaterals, the charges for HR and recruitment software and even workplace integration and engagement costs.

Here are the most important costs to consider when hiring a new employee.

1. Job Description & Ad

Estimated Cost: Three to five hours at the hourly rate for an HR team member.

Writing an effective job description is crucial to setting the right expectations for your open position. Understanding what the role entails and identifying both hard and soft skills necessary to be successful will take some time. Expect your HR team to spend at least a few hours crafting a job description, even if your company uses a template.

Your job ad is taken from your job description but you need to add some flare. A job ad should answer a question every applicant is thinking: Why would I want to work for your company? Sell candidates on your company, what benefits you offer, your culture, and anything that sets you apart from the competition.

2. Posting & Marketing the Job

Estimated Cost: Varies depending on how long you sponsor a job post. With a job board like ZipRecruiter, you can post free for four days and starting at $16 per day after that. There are additional costs if you choose to market the position in other ways.

Posting the job ad to different job boards will also take time. If you’re using general job boards like Indeed or ZipRecruiter, they make posting a job fairly simple—you can use their free job ad templates—so you won’t need more than a few minutes. But if you have a specialized position you’re hiring for, you may need to find a specific job board and take more time to sign up for a new account.

Even if you use a free job board to post your new position, you may need to spend some money to sponsor the job and attract more candidates. Doing this will put your job post at the top of search results, increasing your potential applicant pool.

Besides job board costs, you may also want to market your job online. For instance, you can place a Facebook ad to attract candidates interested in your industry or who have experience in your line of work. This can be a great way to get your job in front of passive candidates, but it will cost additional money.

3. Employee Referral Bonus

Estimated Cost: Three to five hours at the hourly rate for an HR team member to create your employee referral program, plus the bonus offered to employees when a referral is hired.

An employee referral program is one of the best ways to find new employees. When a new hire is referred by an existing employee, they are more likely to stick around than if you hire by any other means.

But to be effective, an employee referral program needs to offer a bonus. You can set it up however you want, but it should be enough to incentivize an existing employee to refer someone they know.

4. Ongoing Hiring Work

Estimated Cost: Varies but budget for at least an average of one hour per day during the hiring process.

According to LinkedIn, the time to hire a new employee varies based on the industry but ranges from 33 to 49 days. While your HR team is not solely working on hiring a new employee during this time, they will at least take some action, like reviewing resumes, every day. So even just a few minutes of their time will be devoted to hiring.

Your HR team will also spend time throughout the hiring process working to ensure you make the right hire, as making the wrong hire can be even more costly. This will contribute to the hiring costs for each new position.

5. HR Software

Estimated Cost: Implementation fees, ongoing monthly fees, plus initial training for HR personnel to use each system effectively.

If your company doesn’t use a human resource information system (HRIS), you should consider it. The best HRIS providers give you access to tools that help manage all aspects of your employees’ life-cycle with your company. While some upfront costs can be high, they make your HR team much more efficient and productive.

An applicant tracking system (ATS) is another tool to consider. Especially if you’re hiring frequently or hiring lots of people at once, an ATS can make keeping track of each candidate much more manageable by storing all information related to each candidate in one spot.

6. Pre-employment Screening

Estimated Cost: Three to four hours for internal screening, varied costs for pre-employment screening tools/software.

When you’re hiring a new employee, you need to make sure they have the skills necessary to do the job. One of the best ways to do this is to give them a pre-employment screening test.

If you’re creating your own test and grading it yourself, the setup costs might be lower, but you’ll need to pay an HR employee to grade and review the results, which could take a long time. On the other hand, if you use a third-party software, you may have more upfront costs, but you’ll pay next to nothing to have an internal employee review the results.

7. Interviews

Estimated Cost: About eight hours of wages for the hiring manager for interviews. Add four to six more if you’re doing more than one round of interviews.

Once your HR team has reviewed applicant resumes and narrowed candidates down to a list of half a dozen or so, the hiring manager will need to interview each of them. Every interview should take about an hour to conduct and another 20 to 30 minutes for the hiring manager to complete their interview notes. Make sure you’re using a structured interview process to ensure a fair assessment of each applicant.

After they have completed all the interviews, your hiring manager will need to review their notes and may request second interviews with the best two or three candidates. This can add a few more hours to the process, increasing your cost to hire.

8. Background Check, Employment Verification & Reference Checks

Estimated Cost: Background check vendor fees and hourly wages for HR employees to perform employment verification and reference checks (less than 30 minutes per reference).

When you make a new hire, you’ll want to do a background check, which is typically outsourced to a background check company. This can vary in cost depending on what level you need (criminal vs civil records, employment credit checks, etc.), especially if the position requires confidentiality or deals with financial information. Make sure you have a background check policy to follow.

Employment verification is also extremely important. You can add employment verification to a background check with some providers at an extra cost. If you’re not using a provider that allows that, you may need to do it yourself or pay another vendor.

You should also check references with every new hire. HR should complete it by following a specific procedure so they avoid asking questions that could cause compliance troubles.

9. Recruitment Firm or Staffing Agency Fees

Estimated Cost: Some 10%–30% of the new hire’s first year salary, plus HR’s time to review resumes and conduct interviews (about three to five hours).

Some companies don’t have the HR support to hire new employees internally, so they look to recruiters or staffing agencies to help them fill positions. If you choose this route, most of the points above will be moot. You’ll still need to interview candidates but much of the due diligence will be handled by your recruiter.

For highly compensated employees, recruitment firm and staffing agency fees can get costly for small businesses. The upside is that you usually have a 90-day guarantee, so if the employee doesn’t work out, the recruiter or staffing agency will find you another worker at no additional cost.

10. Relocation & Bonus Incentives

Estimated Cost: Varies greatly depending on whether and what type of relocation assistance you provide, plus any sign-on bonus.

You may sometimes need to offer relocation assistance to attract high-quality candidates. Relocation often includes movers, transportation costs, real estate agent assistance, a down payment on a house, rental coverage, or all of these. It’s entirely up to you and your budget what you want to provide.

Many companies today offer sign-on bonuses, especially for higher-level positions. Even if you’re hiring for a low or mid-level position, offering an incentive to join your company can attract better applicants. You don’t have to break the bank with a bonus either—$500 can be sufficient.

11. Onboarding & Training

Estimated Cost: Ten-plus hours of HR’s time during the new employee’s first month, plus any costs for training software.

One of the most important aspects of hiring new employees is onboarding them. During this time, you’re getting your new employee acclimated to your company environment and ensuring they’ve reviewed and understood your company policies. Even in a remote environment, onboarding is crucial to setting the right tone for your new employee.

During onboarding, you’ll need to train your new hire on the tools and systems your company uses, plus any job-specific training they may need. Depending on your industry, you may even have to offer compliance and safety training, which could mean you need to use additional training software.

12. Tools & Equipment

Estimated Cost: About an hour of HR’s time to determine the needs for each position. The individual costs of equipment will vary based on the role.

Don’t forget the tools and equipment employees need to do their job. If you’re in construction, for example, you may need to provide all of your employees with safety equipment. If your company operates in a remote office environment, you may need to send your new hire a computer to do their work.

The equipment you need to provide to new hires will vary based on your industry and on the job you’re filling. A remote call center worker may only need a laptop and headset, whereas a remote IT worker may need a dedicated internet connection along with an upgraded computer.

13. Salary & Benefits

Estimated Cost: At least eight hours at the hourly rate for an HR team member to research salary and benefits, plus several more hours to implement any benefit changes.

Your salary needs to be competitive to attract high-quality candidates. Your HR department will need to do market research on salary compensation before hiring to ensure you’re paying at least roughly what your competitors are or even higher. Paying more can give you an advantage.

You’ll also need to be sure your benefits give employees what they want. Snacks and office happy hours are great, but what employees really want are healthcare and retirement options. Sourcing budget-conscious benefits can take some time, but it’s well worth the investment.

14. Adding a New Employee to Your Workers’ Compensation Plan

Estimated Cost: One to two hours at the hourly rate for an HR team member to implement any changes, plus the cost of adding an employee to the policy.

With few exceptions, every employer must carry workers’ compensation insurance coverage. This insurance provides benefits to employees injured at work.

The cost will vary depending on your industry and how many prior claims you’ve had. The average small business spends about $450 per year per employee.

15. Workplace Integration & Engagement

Estimated Cost: During a new hire’s first month, about 10 hours at the hourly rate for an HR team member, and about four to six hours per month on an ongoing basis.

Small businesses often overlook this cost, but it might be the most important. This is more than just providing your new employees with the right equipment they need to do their jobs.

Engaging and Integrating a new hire into your company and their team, ensuring they bond and build rapport with colleagues, is vital to ensuring your business operates effectively and efficiently. This is an ongoing cost and one you should have your HR team focus on regularly.

Bottom Line

Hiring new employees is a great sign your business is thriving—but only if you know how to do it right. By keeping in mind the different costs of hiring an employee, you can optimize your budget while still finding only the most qualified of candidates.