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Taking on your first employee print Print

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In every growing business there is a transition point where the owner realises that the workload has become too much for the people involved in the business and it’s time to consider hiring an employee. This guide will help you take that step by outlining some of the issues to consider.

The leap of faith

You know the time is coming when you should employ someone. You feel that it's the way forward, but you worry that 'there's not quite enough extra business yet…'. If you can relate to this, then you're not alone - many other business owners before you have experienced the same feeling. Taking on your first employee always feels like a leap of faith. If the economy is on the rise, the decision is less difficult to make because work can often increase within a few months to justify a full-time appointment. In addition, employing someone can create its own positive momentum because the step frees you (or another key person) from routine tasks to undertake more marketing.

The good news for most business owners is that taking on that first employee marks the start of a new growth phase in their business. You can increase your chances of this happening if you've done your homework thoroughly and the step is supported by:

  • A strong vision of where your business is heading
  • Effective marketing and promotion initiatives to attract more business (the guide 'How to write a marketing plan' can help here).

Wealth comes from leveraging time

In many businesses (particularly service type businesses), time constraints impose a revenue ceiling. Whatever you charge an hour, there are only a fixed number of hours in the day that you can charge out. The way through this revenue ceiling is generally to employ others, to leverage time. For instance, a mechanic starts an owner-operator car repair business, but as work increases, is able to employ another mechanic. The owner pays the second mechanic $35 an hour, but charges out the work at $80 an hour. The difference covers the wages, plus overheads, plus a margin for profit. This is how the owner leverages the employee's time. The way forward for most businesses is to ask how you can increase your profits by leveraging the time of others and leveraging your own time more effectively.


Questions to ask yourself

Am I overstressed?

It's easy to end up overstressed without realising it. Caught up in daily routine, you hardly notice a gradual work increase until you reach breaking point or risk burnout.

What are my strengths?

Take some time to define your strengths. For example, your main strength might be getting new business, or making the products that you sell. It's important to work to your strengths. This leads naturally to the next question…

What are my limitations?

The next step is to identify your limitations. This includes both lack of skills and also work that you can do, but dislike doing. Do you really need to be doing these things? Could you earn more money for the business by focusing on your strengths?

What do I spend most of my time doing?

For a trial period of a few days, or longer if necessary, note down all the things that you do such as:

  • Production work.
  • Marketing and sales work.
  • Developing key customer/client relationships.
  • Administrative and compliance work (tax and GST compliance, etc.).
  • Activities outside the business (family, childcare, house care, etc.).

What brings in the most revenue?

Now identify the activities that bring in the most revenue for your business. What part do you play in these core activities? How can you maximise the time you spend on these activities?

Prioritise your activities

Ask of each activity: 'Is this the most productive use of my time?' You can't ignore the 'other activities' because they are part of running an efficient business, but does it pay you to do them all yourself? For example, does it pay you to do routine administrative tasks when you could employ someone at, say $20 per hour to do the work for you? Could you earn more than $20 for the business in that same hour?

What opportunity costs are you incurring?

Perhaps the most important question of all to ask is: How much potential business am I losing because I'm not employing someone? Consider this opportunity cost as well.


Doubts about employing others

Hesitation about employing someone usually falls into two categories.

Concerns about the mechanics of employment

These include worries about:

  • The extra 'hassle' and learning curve involved in compliance issues such as PAYE, keeping salary and wages records, and dealing with issues such as KiwiSaver, holiday pay or overtime, parental leave, etc.
  • Dealing with employment issues such as the need for an employment agreement, or possible union involvement in your business.
  • Using an online payroll solution like SmartPayroll can help alleviate these worries. SmartPayroll makes it easy to enter wages and salaries and automatically calculates and files PAYE with the IRD. They will also work out holiday pay and KiwiSaver contributions on your behalf.

Concerns about the implications

These are concerns about issues such as:

  • What if I don't employ the right person?
  • Can I dismiss someone if the person proves unsuitable?
  • How can I avoid a worst-case scenario such as a personal grievance case?

You can get help with employment issues from organisations such as your industry group, the local Chamber of Commerce, or from the Employers and Manufacturers Association. You'll also find useful information on the Becoming an employer section of the Inland Revenue website or you can access Inland Revenue's interactive Tool for business, which explains your obligations in simple, clear language.


Steps to a full-time employee

Here are some alternatives, or steps to taking on that first full-time employee:

Part-time employee

Advantages:Works well if you know work is on the increase, but perhaps not yet enough to justify a full-time employee. If there is enough work, you can always increase the number of hours per week.

Disadvantages:Part-time employees are often looking for longer hours or more permanent employment, which means that you might lose the time and money invested in their training.

Using an online payroll solution like SmartPayroll can help alleviate these worries. SmartPayroll makes it easy to enter wages and salaries and automatically calculates and files PAYE with the IRD. They will also work out holiday pay and KiwiSaver contributions on your behalf.

Employment for a 90 day trial period

This can be a good way of testing an employee's suitability for the job because the employee is aware from the start that they have to meet certain expectations. From April 2011 the trial period is available to all employers, not just smaller businesses.

You must make the trial period clear to them at the start. The two critical elements are: a) the 90-day trial period must be clearly stated in the employment agreement, and b), the employee must sign the agreement before starting work, not after starting employment.

While employed, they have the same rights as permanent employees. Your treatment of them must be fair and reasonable. You must let them know very clearly what your job standards and expectations are. If they are not shaping up to the job, you must give them fair and reasonable feedback and help, such as additional training or resources to help them achieve your expectations.

If you have to dismiss them, you must follow the same correct procedures as for a normal employee. In other words, there is little real difference between taking on a person full-time and taking on a person subject to a probationary period.

Fixed-term contracts

Advantages: Very suitable for fixed-term projects. You know what your costs will be, and you know when these costs will stop. For example, a software developer gains a contract to build software for a company. The developer employs a specialist to write the program, install it and train the customer's staff in its use.

Disadvantages: You can't use a fixed-term contract as a disguised probationary period. There must be a genuine reason and logical closure point for the contract, such as a fixed-term project, and you must explain the fixed term to the employee. It's often difficult to attract quality staff under fixed term contracts, particularly if the contract period is short. People on fixed term contracts will naturally be looking for other work or more permanent work.

Using subcontractors

Advantages: Very suitable for fixed-term project work or for work you don't want to do yourself (such as book-keeping). You have no concerns about employment or compliance issues. If the relationship doesn't work out, you can terminate the relationship.

Disadvantages: You cannot 'disguise' an employee as a subcontractor. Your definition of a 'real' subcontractor might be different from the viewpoint taken by Inland Revenue, and you might end up accountable for taxes the 'subcontractor' has failed to pay Inland Revenue. Get more guidance from Who is an employee or a contractor? In general, only employ people with their own established businesses as subcontractors. Ask your accountant or contact Inland Revenue if there is any doubt. Bear in mind a subcontractor may have no particular loyalty to your business. It can be more difficult to control and supervise the quality of the work.

In general, only employ people with their own established businesses as subcontractors. Ask your accountant or contact Inland Revenue if there is any doubt. Also, a subcontractor has no particular loyalty to your business. It's more difficult to control and supervise the quality of the work.

Your ambassadors

Treat your employees well, and you'll get double the benefit back. Always remember that your employees represent you and your business in all their contact with your customers, your suppliers, and everyone else that they meet. You want them to be good ambassadors for your business.


Working out a break-even

If you do want a full-time employee (they are more likely to be loyal and concerned for your business), then before you take them on, make sure you first work out how much extra business they must bring in to pay for themselves. Here's some help:

Service business example

If you operate a service business, you need to calculate a charge-out rate for employees. For instance, if you plan to charge out an employee's time at $80 an hour and pay the employee a salary of $50,000 a year, then they must work 625 hours in that year ($50,000 divided by $80) just to recover the cost of their salary.

The conclusion? If you think there is not enough work in the marketplace to generate at least another 625 hours of work (or 14 chargeable hours a week (625 hours divided by 46 weeks) then don't employ them. Note that this calculation doesn't include overhead costs or a profit margin - just the bare salary.

Products as well as services

If you sell products as well, then calculate a break-even point for your employee using your gross profit percentage. For example, if you intend paying a retail assistant $35,000 per year and your gross profit percentage is 30%, then you must sell an extra $116,667 in the year just to cover the employee's salary (35,000 divided by 30%).


Further information:

To talk to an ANZ Business Specialist:
Call 0800 269 249
Visit your nearest ANZ branch


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