How do you know when to take on an employee in your business?

Are you ready to outsource or take on an employee in your business? It’s a question many entrepreneurs have but are terrified of exploring, especially when they’re ready to grow. And at first glance, it may seem that an outsourcer is your best option - but is it the right option for you and your business?

It’s a subject I’ve recently been chatting with Victoria Johnson about. Victoria runs Green Jay Group company and helps STEM startups get their people and culture how they want it to be. She also offers one-to-one leadership coaching, helping founders of businesses decide on the best ways to outsource, because it isn’t always easy deciding between hiring an employee or outsourcing to a freelancer.

The missing strategic decision

Many business owners are eager to get started. They operationally need to grow and want help to clarify options. But before this point, there is a need to make those strategic decisions first. Can you afford to hire? What can you afford? What do you actually need? A full-time employee may not be the answer to your resource problems.

Many solo entrepreneurs immediately think an outsourcer is the best option, but what if you get it wrong? How do you pick someone suitable? And is it best to start with a freelancer, rather than an employee? And the answer depends on several factors.

How to decide between a freelancer and an employee

Once you know what you can afford and what you need them to do, you have a starting point. But it’s also equally important to understand how you need them to do the job in question, and this is something so many entrepreneurs struggle with. Because it’s easy to think you need a contractor but you’re really talking about an employee in disguise.

So what’s the difference? If you want somebody who you’ve got flexibility with and who’s got the specialist skills you need, you’ll often opt for a contractor. But how do you want them to manage their workload? Are you seeing that person as someone who will manage interns and start employing a team? Do you want them to come to all company meetings and share in all that knowledge? Are you looking to control and decide what they’re going to do, how they’re going to do it, and the hours and days they work? Then that’s an employee, not a contractor.

Take a Virtual Assistant as an example. You know they have other clients, so you can’t demand to pick the days and hours they work. You select how many hours you want and the work you want them to do, and it’s up to them to manage when they will fit those hours in and how they manage the work. Whereas an employee will have fixed hours and a set job description, etc.

Choose the right contract for your needs

The contract is another important consideration, as it helps identify and clarify your needs. For example, you could have an employee in the business and you don’t know how long you’re going to financially sustain their role. You could have a one week notice period written into their contract, so if you don’t need them anymore, you can end the contract. You may also decide if you’ve got a fixed package of work, that they have a longer period in which you have to give the notice. It all comes back to the detail and the arrangements you have in place for those people.

You can clarify it further by asking yourself how you’ll separate that relationship when you need to separate it. Also, what financial runway have you got in place? Be it an employee or a contractor? And what type of contract best suits your needs?

You also don’t want to be in a position where you have a contractor who you can use a lot of knowledge from, being able to walk out the door with a week's notice. Because it’s easy to think how simple it is to get rid of a freelancer, but they can easily leave you too! But also what if it isn’t working out? How easily can you end it if it’s not working for either of you? It’s all driven by the employee contract and the operational needs of your business. 

Employees legally require more than just a salary from you

You also need to ensure you’re considering all employment law requirements - so it’s essential to get yourself an employment specialist, to help check you’re doing everything right. Because it isn’t just a case of checking you can cover their salary and holiday pay, there are other things to consider too.

When you take on an employee, you need to think about all other obligations. First up, you need to register them with HMRC, so you can connect them with their payroll. National Insurance, pension contributions and holiday pay are some things you have to think about. You need to pay employees at least 28 day holiday a year, regardless of whether they’re going to be working in the business on those days. 

You also have a notice period within that contract and this is an area many people don’t consider enough. This is something you need to factor into your financial runway. Because if you don’t have that money tucked away and budgeted for, you may find you suddenly need to downsize the business and end that relationship, but don’t have the funds available. So as a rough guide, you have their salary and you need to add on 30% to cover the main things and then the notice period on top of this.

Be clear on the employment status of anyone you take on

A contractor will cost you more than an employee, too. As a general rule, you can expect to pay more for a contractor, to the tune of 30%, but they’re also going to be much more flexible and you’re only paying for hours used. But you also have to be careful you’re not making them a pseudo employee and falling foul of IR35 as well.

An IR35 is the ruling about stopping you from having a contractor when they should be an employee. In doing so, you’re avoiding paying National Insurance on that employee. It comes down to common sense really though, because you know deep down if you’re employing somebody as an employee or a contractor. You can also go to the Gov.uk website and use their Check Employment Status tool to clarify. It’s a wizard tool that runs you through everything and gives you a decision at the end, based on what you’ve typed in.

Choosing between a freelancer and employee

So when trying to decide between taking on a freelancer or an employee, it comes down to four key things - control and capability, mutuality of obligation, and integration. We’ve previously talked about control and capability, but what about the others?

Mutuality of obligation - So does that person have the right to say no if they don’t want to do something or work certain days? If they have the right to say no, then they're likely to be a contractor, rather than an employee. 

Integration - As touched on earlier, it’s things like is this person going to come along to all company meetings, or be at the senior management team meetings and be privy to all your financial information within the business? If so, then they're likely to be an employee, rather than a contractor. You can have project managers who are contractors, but if they're managing a big team and getting down to the details like signing off holidays, or managing sickness and things like that, you're really looking at an employee, because the rules are that you shouldn't have a contractor in a role that is an employment role - and ‌managing people falls into that. 

Economic reality - So if a person makes a mistake in their work, who is liable to correct that mistake? They’re an employee if it's the business, whereas if the person who made the mistake has to correct it financially or with time, they’re classed as a contractor. 

So if you think about those four things, you can take a step back and assess it all strategically. If you’re looking to fill a role where you need them to manage people, you want to control what they do and when they do it, and will correct their mistakes; you’re looking for an employee. Whereas if you just need the work done and none of the other things, you want a contractor.

Think about skills and packages too

And finally, think about the skills you need access to. Do you need a Virtual Assistant or a tech person or someone to produce your podcast, for example? That's when you get a freelancer in, as you need somebody to do a very specific thing. Because if you can package up a piece of work, then it's much easier to package that to a freelancer or somebody who's self-employed. You don't really package up work for an employee, because what you want from an employee is for that stretch time. You’re looking to fill a day with different tasks. But with a freelancer, you're looking for those specific skills you need them to do.

It’s really important in your small business to think about outsourcing as early as you can possibly afford to, even if it's only a few hours a week. It gets you in the habit of outsourcing and delegating work, and understanding how to find those people, take recommendations, and be really specific about what you need help with. So look at all the things you could outsource in your business and also keep a list of things that you'd like to outsource. You can then start researching suitable solutions and working out the budget you need to make this happen.