It is difficult to understand how much money different forms of hiring will truly cost your company. What most people really want to know is whether you should handle it all yourself, or pay someone to manage some or all of your hiring. Many even wonder if they should choose another option entirely, like staffing agencies or on-demand labor.
Full disclosure, Veryable is one of those “other options entirely” as a provider of an on-demand labor marketplace. As much as we wish it were the case, our solution can never be the only solution for filling your workplace with the workers you need to get the job done. But because our solution works alongside others, we have to understand how the cost of our on-demand marketplace compares to the costs of hiring employees.
In this article, we will give you an objective explanation of the differences in the costs of directly hiring employees versus the costs of on-demand labor. By the end of the article, you will have an understanding of the factors that impact the costs of each option and which methods for finding work will be best for you.
As you probably know, the costs of hiring an employee go beyond just the hourly wage you pay them. Of course there are benefits, taxes, insurance, and other related hiring costs associated with hiring employees. The easiest way to understand both the obvious and the more hidden costs of directly hiring an employee for your company is through an example scenario.
Imagine the following situation: You are paying a full-time HR worker named Pat a salary of $62,500 a year including benefits and taxes. Assuming a 2,000 hour work year, you pay them $31.25 an hour.
In the following steps of the hiring process Pat follows, we will outline the costs you incur along the way.
Pat posts job openings to several job boards and receives 150 resumes. They then filter down the resumes to a manageable list of 50 resumes to review. Let’s break down the time spent filtering and reviewing resumes, and how much it costs.
Filtering resumes received - 20 minutes
Resumes actually reviewed - 50
Time spent per resume reviewed - 2 minutes
Total time spent on resumes - 2 hours
Pay rate of HR worker - $31.25/hour
Total cost of reviewing resumes - $62.50
After reviewing resumes, Pat has to screen the candidates by phone to be certain they are still interested in the job and to arrange the next steps of the interview process. Pat is only able to get in touch with about 20 of the applicants. The rest do not answer the phone. Here’s what this might look like.
Unsuccessful calls - 30
Time per missed call - 20 seconds
Number of Phone screens - 20
Time per phone screen -10 minutes
Total time spent on phone screens and calling - 3.5 hours
Pay rate of HR worker - $31.25/hour
Total cost of phone screening - $109.38
Out of the phone-screened candidates, only half are able to show up for an on-site interview. Pat spends time interviewing each of the candidates to determine which ones will be a good fit for your company. The breakdown goes like this:
Interviews - 10
Time spent per interview - 15 minutes
Total time spent on interviews - 2.5 hours
Pay rate of HR worker - $31.25/hour
Total cost of interviews - $78.13
Pat believes five of the ten workers interviewed were a good fit, so they offer the candidates a job. Only three people accept the offer and pass a background check and drug screen. After that, it takes time to get each employee set up in the payroll system, enrolled in benefits, and set up in the timeclock system. Here’s what that looks like:
Time spent setting up employees - 3 hours
Pay rate of HR worker - $31.25/hour
Drug screens (x3) - $105
Background checks (x3) - $90
Total cost of payroll, benefits and timecard setup - $288.75
Now that the three employees are ready to work, they will need training. They successfully complete their training during a 10-day onboarding period. During this time, they are not operating at 100% of expected productivity, which costs the company money in the form of lost productivity.
If each of these workers is paid at $13 an hour and you factor in their benefits at $3.25 an hour, the true hourly cost to your business per hour is $16.25. For an eight hour shift, this worker would cost $130. For three workers on an eight-hour shift, that’s $390 per day.
By calculating the lost productivity for each day of training, you can arrive at the total cost of training as $1,405.
After all this work to hire three employees, the worst case scenario unfolds: one person quits for a different job down the street and another gets into a fight and is fired. Man, when it rains it pours! Now you are left with one employee, and Pat has spent a considerable amount of time just for one worker to stick around.
By adding all of the above costs together, you will see the total cost of hiring a full-time employee.
Reviewing Resumes - $63
Phone screens -$109
Interviews - $78
Drug screens and background checks -$195
Payroll, benefits, and timecard setup - $94
Wages paid during training period - $3,900
Lost productivity during training - $1,405
Total cost to find and train one employee - $5,844
These are the hidden costs of hiring an employee and getting them up to speed if you are dedicating your company’s time to finding them. If you multiply this number by more than just a few employees per year, you will see the costs quickly add up when you scale your business.
On-demand labor differs from directly hiring employees in a few key ways. You do not have to spend time reviewing resumes, you do not have to perform or purchase background checks, and you can find workers who already have the skills needed for your work. You can also avoid spending time setting up payroll and benefits because those will be handled by the on-demand labor platform you choose.
Let’s return to the example from before, in which your company has a human resources employee who is charged with finding more workers. If you were to have Pat spend just 30 minutes per day managing the on-demand labor through the platform of your choice, they would only spend about 125 hours per year on finding workers.
That’s a cost of $3,906 per year no matter how many workers they would be managing from the portal. Compared to the costs of directly hiring, which increase as you hire more workers, on-demand labor adds nearly zero costs to scale.
The cost of finding one worker through on-demand labor would be the time spent on the platform (which in this case will be assumed to take longer than average because your employee is new to the interface) plus the fee paid to the platform for connecting you to the worker, which starts at $45 per op and can be lowered by enrolling in an annual plan.
Assuming the same wage paid to the worker from above, and that they work the same 10-day span doing work they already know how to do, we can find this cost for easy comparison.
Time spent finding one worker - 1 hour
Rate of HR worker - $31.25/hour
Hourly wage of on-demand worker for ten days - $1300
Platform fee for 10 ops - $450
Total cost of finding one on-demand worker
$1,781.25
If you cannot find a worker who already knows how to do the work you need, you could factor in the training cost of this worker as we did above. If they must be trained on something specific to your job, this is where some of the training and lost productivity costs come into play.
For the sake of easy comparison, we will assume that you are now hiring and training three workers as you were before.
Time spent finding three workers - 1 hour
Pay rate of HR employee - $31.25/hour
Hourly wages for on-demand workers for ten days - $3900
Platform fee - $1,080
Lost productivity in training - $1,461
Total cost of finding three on-demand workers - $6,472.25
Total cost to find and train one on-demand worker
$2,157.42
Compared to the cost of directly hiring an employee, on-demand labor is much less expensive.
Cost to find and train one employee - $5,844
Cost to find and train one on-demand worker - $2,157.42
On-demand labor is essentially a pay-as-you-go model for finding workers that scales with less cost and takes less time to manage. The traditional model of hiring directly is more expensive and time-consuming, but many feel more comfortable with this system because they are familiar with it.
A key difference with on-demand labor is that you would not have to repeat the training process every single time you need a worker. Once you have trained a worker, you can invite them to bid on your work again in the future. If they want to work with you again, they would then be added back into your workforce temporarily at only the cost of the platform fee and the brief time spent inviting them to the job.
On-demand labor cannot fully replace directly hiring full-time employees. But when adding extra hands during a peak season or when you need to scale your business fast, it is a less expensive way to get additional workers on the job.
To find out if on-demand labor is worth the price tag for your business, read our blog on the top five benefits of on-demand labor.
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