A 2014 survey of business leaders found that 71 percent prefer to develop their current employees’ skills and then move them into more-senior rolls versus hiring an external candidate for the same position. There are many reasons why this is so, from performance to improving morale and reducing turnover. However, there are also situations in which an external candidate might be a better option. The trick is determining when; you’ll need to consider the following factors to figure it out.
If you’re worried about hiring costs, you might want to look to internal candidates first. Outside recruiting fees can run as high as 25 percent of a position’s salary. And if you choose to recruit externally yourself, you’ll incur costs for posting job ads as well as promoting them. You’ll also need to spend more time screening and interviewing candidates you’ve never met versus reviewing the skills and performance of an employee who already works for you.
If you want to pay a lower salary, you might want to look to internal candidates first. According to the Society for Human Resource Management, external hires often get paid 18 to 20 percent more than internal hires do. If you have employees within your organization who are capable of the job, it may make more financial sense to promote them—and increase their compensation accordingly—than to hire an external candidate with the same skills and a much higher price tag.
If you want to reduce your onboarding and training costs, you might want to look to internal candidates first. In many cases, an external hire will require more training than an internal hire will. You’ll also have to devote time to communicating your organization’s policies, processing employment paperwork including retirement accounts and health insurance, and introducing them to the existing team.
If you’re interested in tax incentives, you might want to look to external candidates first. Federal and state governments offer many tax credits to help offset the costs of hiring and training new employees. For example, the Department of Labor Work Opportunity Tax Credit is available to organizations that hire workers from certain target groups including unemployed veterans, food stamp recipient and ex-felons.
If you’re expanding or diversifying and adding a brand new role, you might want to look to external candidates first. If you’ve created a new position that is unlike any other in your organization, you may not have any current employees who can successfully fill it without a significant investment in training and/or education. In this case, it likely makes more sense—financially and in terms of productivity—to seek an experienced candidate outside your company.
In light of the Department of Labor’s (DOL) recent changes to overtime pay rules—issued on May 18, 2016—more business owners are concerned about controlling overtime costs. The increase in the minimum salary an employee has to earn in order to be exempt from overtime pay (from $23,660 to $47,476) is expected to increase the number of workers eligible for overtime by 4.2 million. Complying with this change will add to companies’ payroll costs and may also impact their administrative and legal expenses as well. Fortunately, there are steps you can take to minimize the effects of the new rule on your business bottom line and remain in compliance.
Review your workers’ job classifications. Exemption isn’t just based on earnings; it’s also determined by the type of work the employee does. Workers who earn more than the threshold amount ($47,476) but who do not perform primarily executive, administrative or professional duties(all relatively high-level work), cannot be classified as exempt and are eligible for overtime pay. A summary of exempt job duties can be found here. Carefully examine the job descriptions, roll requirements and hours worked for all positions within your organization. If you have workers performing those duties but earning less than the threshold, you’ll need to reclassify them.
Compare the costs of payment options. Let’s say you have a previously exempt worker who is earning a salary of $46,000 a year and whose position regularly requires him to put in more than 50 hours a week. You’ll probably save money in the long run by raising his salary to $47,500 and continuing to classify him as exempt than by keeping it where it’s at and paying him overtime every week.
On the other hand, maybe you have a previously exempt employee who earns a salary of $23,000 a year and who usually works 50 hours or more a week. Raising the employee’s salary above the new threshold may cost more than reclassifying him as non-exempt and paying overtime. You could also look at hiring a part-time employee to take on some of the work (eliminating the need for him to work overtime altogether) or otherwise redistributing duties to reduce his workload.
Monitor employee hours carefully. In the event of a lawsuit or DOL investigation, you’ll need to be able to document the number of hours your non-exempt employees worked and any overtime hours for which they were paid. Wage and hour claims account for the greatest percentage of litigation in employment law, and many of those lawsuits arise as a result of misclassification issues and wage violations. While the DOL does not require employers to use automated time-management systems, manual time tracking can increase errors and reduce the accuracy of your payroll process. Automated systems not only continuously track time worked but can also help you more closely monitor overtime and creative cost-effective work schedules.