The gig economy has been booming for the past decade. And the recent epidemic has only accelerated this trend. By 2023, the gross volume of the gig economy is expected to reach $455.2bn in the US alone. 

The gig economy is traditionally defined as digital platforms that allow freelancers to connect with clients for specific projects, contracted work or asset sharing. Think Uber, Amazon, Upwork. Statistics indicate that the gig economy is expanding 3 times faster than the US workforce as a whole. With such a significant market size, we can say we enter a new era in employment.

As a CFO, I don’t expect this trend to slow down anytime soon. 

New federal rules are starting to clarify previously grey areas of employment: The US Labor Dept  issued at the start of Jan 2021 a final rule to determine the standards by which a worker can class as an employee or an independent contractor. While it is yet to be seen if the current administration reverses or rolls it back before taking effect in March 8, it does set out some provisions in what has always been a previously complex and ungoverned area. 

But what does this mean for small business, from a financial point of view? Specifically, what do these new work alternatives and regulations fit in with your business finances? 

Let’s take a look at a common job these days, IT Engineer. 

What is the cost of contracting?

Salary.com puts the hourly rate of a software engineer at $64.

Assigning a day of work at 8h, to find the daily cost:

$64 x 8 (hours) = $512 cost per day

What is the cost of a hire?

Glassdoor puts the IT Engineer salary in the NY area at an average: $75,955.

We can take this basic salary, divide it by the average number of weekdays, and work out the cost per day. There are 260 weekdays per year, and taking into account a basic of 20 minimum vacation days and 10 public holidays:

260 – 20 (min vacation) – 10 (public holidays) = 230 work days

So the day rate works out at:

$75,955 / 230 = $330.24 cost per day

We could stop here and say that contracting is costing your business more, but this is not the full picture of hiring a new member of staff. 

As a CFO, I often work out the full added costs for my clients and here’s what you don’t know:

The hidden costs of a hire

For businesses in NY, there is an 8% tax that as an employer you need to pay, plus a few different types of insurance and pension contributions. So on average: 

• 8% Employer Tax 
• Health insurance 
• Dental insurance 
• Vision insurance 
• Disability insurance
• 401(k) match contributions

TOTAL Added Benefits = 35% extra on top of the basic salary

35% of 75,955 = 26,584.25

So in reality, the FULL cost that a small business has to cover for an IT Engineer is: 

$75,955 + $26,584.25 (35% Benefits) = $102,539.25

Now a more accurate daily cost for your business is:

$102,539.25 / 230 = $445.82

We are just about coming close to the real cost of hire. 

While we are fairly used to absenteeism and it’s pretty easy to spot, we are less concerned with a phenomenon that’s less visible called presenteeism. I call it “dead time”, but it essentially means being physically present at work but sick, unproductive, or having to deal with other commitments.

In high-performance cultures, being present despite not being well enough to perform the job, it’s usually driven out of a sense of professionalism and responsibility. There is no blame on the employee. 

Nonetheless, a Harvard Business Review study estimates the loss of this dead-time to individual productivity is about a third or more. It’s like having a workforce that operates at only 2/3 capacity at all times. 

When we take this into account for our IT Engineer, it means that instead of 230 full productive days, he can only realistically achieve:

2/3 of 230 = 153.33 fully productive work days

At the previous cost of $102,539.25 this means:

$102,539.25 / 153.33 = $668.75

As we finally reached the most complete picture of the REAL cost of a new hire (and this can apply to almost any other job title), the only thing left to conclude is deciding on the actual need for the business.

• Do you actually need to hire?
• Do you need constant access to a particular skills set?
• Do you only need a few hours per week or per month? 

Answering these questions, while having the full financial picture of a potential hire, makes it easier to take decisions. That’s why when you work closely with a CFO, you can get a real understanding of your business needs and find the most efficient solutions for it. 

After all, numbers never lie!

*Please note: This article hasn’t taken into account more specific costs such as recruitment or training, as these can vary hugely depending on location, job, and company setup. But I typically account for these as well with my 1-to-1 clients. If you want to schedule a free chat to talk more about your company’s financial future, drop me an email: admira@karecfo.com