Hiring talent is a crucial decision, and the question of hiring a permanent employee or engaging an independent professional deserves serious consideration.
Johann van Niekerk, co-founder and CEO of Outsized, breaks down the cost and other implications of hiring permanent employees compared to independent contractors.
The true cost of a permanent hire: Beyond the salary
Let’s take a look at the true cost of hiring a permanent employee. While the advertised salary of, for example, R50 000 per month (or R600 000 annually), may seem straightforward, this isn’t the whole picture.
Many companies offer performance-based bonuses, often around 10% of the annual salary, which needs to be added to the cost.
Finding the perfect fit usually includes recruiters and their fees – on average between 15-25% of the annual salary. This is typically spread over an agreed period, on average 12 months for new hires, adding an additional R45 000 – R60 000 to the annual cost. This takes our annual salary to +-R650 000.
To obtain a true monthly cost, we must also consider paid leave and sick leave. Permanent employees are entitled to 20 to 22 days of leave per year (about a month), and then additional leave for sick days or family emergencies (add a week). Now deduct 1.25 months from the year and divide R650 000 by 10.75 months. The result is a true monthly cost of approximately R60 465. This is about 21% more than the stated R50 000 monthly salary, reinforcing the importance of budgeting at least 20% more than the base salary for a permanent hire.
The costs and advantages of independent contractors
The way we measure the cost of engaging the services of an independent contractor is quite different to the cost equation when hiring permanent employees.
Firstly, independent contractors are typically sole proprietors who hire out their skills for an hourly rate or project fee. The recruitment fees for agencies in this instance range from 10% – 30% of the contractor’s pay rate.
However, it’s not just about costs. Independent contractors offer many other advantages too. With independent talent, the burden of unemployment insurance and other employee-related costs falls on them, not your organisation.
The global trend of hiring contractors for specific skills helps companies remain agile. And in a tough economy, hiring independent contractors allows for the quick scaling of resources without the restrictions of retrenchments or notice periods. This flexibility is invaluable, especially during high growth phases with fluctuating workloads.
An often-overlooked consideration is the skill and expertise possessed by independent professionals, honed through years of experience. You’re essentially hiring an expert for a specific task, so their fees are higher as they reflect that expertise. Independent contractors typically require minimal training and onboarding and have an execution mindset. Their independence relies on the quality of their work, so expect to pay a minimum of 30% more than the monthly salary figure.
This degree of quality and specialisation means independents are often more flexible and can offer a higher return on investment. These professionals bring niche skills and deep expertise, driving projects forward more efficiently and effectively. Paying a premium for this level of skill is a smart investment.
How to find the right fit for your business
Understanding the true cost of a permanent hire helps in appreciating the value of an independent contractor. It’s not that the cost of a permanent employee is miscalculated; it’s the approach to the budget that needs to evolve. Organisations should recognise the benefits of not having to pay for leave, bonuses, sick leave and office space.
Making the right choice for your organisation
The ideal solution for you depends on your specific requirements. If you need someone to fill a culture-heavy role such as a leadership position, or a department head, then a permanent employee might be the right choice for your organisation.
However, if you require a specialist for a specific project, or are looking for more flexibility in scaling your team, independent contractors could be a more cost-effective and efficient option.
Hiring decisions are strategic investments. Weighing cost versus value ensures that companies not only manage expenses but also maximise returns, which drives sustainable growth and success.