How to Decide Whether to Outsource or Hire Employees

June 20, 2008

Hiring a full-time employee is a big decision for most small business owners. In many cases, you’ll be better off selecting another option rather than hiring a full-time employee and assuming the legally mandated responsibilities and costs involved. Savvy business owners exhaust all other options before making the decision to hire a full-time employee.

To Hire or Not to Hire

Here are a few important points to consider when you make this important decision for your business:

Carefully research the costs of hiring someone who meets your talent requirements. Assume you will have to pay a competitive salary or hourly rate, plus benefits.
Calculate the real up-front costs of recruiting and hiring:
- Advertising the position
- Employment agency fees
- Employee referral fees
- Your interviewing time and expense
- Your training time and expense
Consider all the hidden costs of hiring employees:
- Payroll taxes
- Legally mandated benefits like workers’ compensation, etc
Consider how difficult it will be to hire the kind of individual you’re looking for. Is the talent you’re looking for in high demand and in limited supply or is there an adequate supply of talent in the local marketplace?
Consider your own past performance in hiring employees. Have you had a lot of experience and success making hiring decisions? How many bad hiring decisions have you made in the last couple of years?
Remember how difficult it is to hire really good people!

Other Options

If you’ve determined that hiring a full-time employee is not the right decision for your business at this time, evaluate other options for getting the work done.

The most common alternatives to full-time hiring, along with their advantages and disadvantages, follow.

Part-time employees: Hiring part-time employees costs less, because you don’t have to provide many of the costly benefits you must provide to full-time employees. However, using part-time employees can result in higher turnover and less committed workers.
Independent contractors: These are individuals who are self-employed and running their own businesses. Contractors typically possess special education or training, experience, or licenses. Using contractors allows you to avoid paying employee benefits, payroll taxes, and other costs associated with hiring employees. A disadvantage of using contractors is that they often work for other clients besides you, which means you may not have complete control over their work hours and commitments. You must also keep up with how the IRS qualifies contractors. The penalties for misclassifying an individual can be very costly and are incurred by the employer (you), not the contractor.
Temporary help: The biggest advantage of using temporaries is that they cost less because you don’t have to pay for benefits and employment taxes. Other benefits are that someone else recruits and qualifies the people you need and you don’t have to make a long-term commitment. If you decide to use temporary help, be aware that employment law requires you to provide temporary help with the same benefits as regular employees after they have worked for you for one year. Also, if you’re looking for technical or specialized skills, you may find it difficult to get the talent to work as temporaries.
Leased staff: Using leased staff is very similar to using temporary help, except that another business employs your workers. You pay the leasing agency a fee plus expenses, and they pay for employee benefits, withholding taxes, training, etc. Leasing is a viable option for small business owners who need specialized help in areas like human resources or accounting, or who simply want someone to take over administrative responsibilities for their entire staff.
Student interns or volunteers: Depending on the work you need done, you may be able get help for little or no cost. Interns or volunteers can be a great option if you have a project or assignment that offers people an opportunity to learn a new skill or get experience in your industry. For example, hiring an intern to conduct market or customer research would be a great project for many college or university business school students.