THE HIRING SERIES – Part 1 – 5 things you need to do before you make your first hire (Ep 48)

Show notes from episode 48.

First a little bit of background on me and my experience with this stuff. We have hired 13 different full time employees and 1000+ part time employees over the past 9 years since we started. We are a pickup and delivery storage company. We aren’t a tech company. We aren’t scientists. Is our company simple? Far from it. Our logistics are crazy. But it’s not rocket science.

Of the full timers most of them we placed in bigger and better jobs for bigger and better companies. A few were let go. One of them quit. I challenged and empowered them and they learned alongside me. We run a small niche company. I would estimate the entire USA market is $10MM in my industry. So its natural that some of them ended up outgrowing our company.

Soon the value they could add for someone else with a larger higher profit margin business was larger than they could add for me so the balance was off and it made sense for them to move on to bigger and better things and get paid more money.

Let’s start with a hypothetical you are probably all too familiar with. It happens to every entrepreneur when they finally get some momentum.

The phone keeps ringing but you can’t answer it. You are busy and can’t focus on the important stuff that isn’t urgent. You are running around putting out fires. Your lead time is increasing and speed is no longer your competitive advantage. You need some help.

This is good news. It means the business is growing. Your concept has been proven. There is room for you in the market. You have an opportunity here. Making a hire is the next step.

But hiring is the hard part and it’s the part that many many businesses can never get right. It’s what keeps small stressful businesses from becoming organized profitable businesses ready to grow. This is exactly where most small businesses get stuck and why it’s hard to find a local small business that answers the phone and can meet you tomorrow to help you solve your problems.

Hiring is hard because nobody else will work as fast as you do. Nobody else will care as much as you do. They’ll make more mistakes. They’ll ask a lot of questions. We hear it all the time and could go on and on and on with the reasons this isn’t an easy step.

The first step is understanding that a switch in perspective needs to take place and your role in the company will totally change.

You have to make the switch from laborer to manager. From doer to delegator. Just because you know how to do the job perfectly does not mean that you know how to train and manage others on delivering a consistent service to your customers.

The job requires skills. The job requires experience. It’s complicated to do. Okay I get that. Before you make a hire you need to do three things:

1. Get comfortable charging more for your services

Far too many business owners and operators undervalue their service and choose to compete on price because they feel like they have to get every customer that walks in the door.

Let’s make an assumption here and say that 50% of the customers in the market care only about the price and they are okay accepting a slow turnaround and/or shoddy service. You need to ignore these customers all together and feel perfectly fine turning them away and losing out on their business. Your service isn’t designed for them.

You can’t get emotionally attached to a lead. You will lose leads. You will get turned down. You will have people try to haggle with you and stomp off in a fit of rage when you refuse to play the game. That is perfectly OK. You have to make the choice NOT to compete on price. Podcast episode 13 talks more about this.

Your service is designed for people who are looking for quality service on a quick timeline and are willing to pay a premium for those things. So what does this mean?

Its a numbers game. Converting 30% of your leads charging 50% higher is a lot better than converting 75% of your leads 10% above your costs. Play the game and stand by your guns. You will lose some customers. Thats expected. This is the hard work of building a scalable and healthy business.

Charging more does a number of great things for your business. It allows you to pay your employees better and invest more in a more selective hiring process with background checks and more thorough interviews. It allows you to invest resources in managing them and making sure they have the tools they need to succeed. It puts some padding in there so you can step back and work on the stuff that is important but not urgent and delegate things that aren’t in your wheelhouse. It allows you to focus on what you are best at and turn down business. It allows you to fire customers that are causing most of your problems.

2. Simplify the job by breaking it down to its simplest form and removing non-essential tasks

Even an amazing employee can’t thrive in an environment where they are asked to do 30 things well. Take as much off of their plate as possible so they can focus on doing their main objective well and aren’t spread thin among a bunch of different tasks.

We learned this lesson the hard way at Storage Squad. We used to have a 30 item checklist on the back of the clipboard each of our employees carried with all of the jobs they needed to remember to do when servicing a customer. It ranged from customer service to box labeling to billing to loading to scheduling.

They sucked at everything. Ivy league kids were failing miserably at delivering a consistent service to our customers. Our training was complicated and took a lot of time and energy. When we finally got an employee trained up and doing a decent job turnover would cripple us.

We figured out we needed to simplify their tasks and take as much off their plate as possible. Instead of training them to be proficient (at best) at customer service we directed all of the customer service to a specialist who focused on doing only that job really well. We had employees focus on driving and loading the truck and instead of also having them unload and organize the warehouse we had a totally separate team do that. We had specialist employees handle the billing. We had someone off-site handle the scheduling and communication with customers. And on and on.

When we simplified it they did much better. Training was much simpler. Turnover was easier to deal with. Average employees begin to thrive and we didn’t need to find spectacular people to implement our system.

3. Start by delegating the low-skilled aspects of the job

Looking at the big picture it’s easy to think there is no way someone who isn’t you could do the required task. But when you start to break it down and think about all the actual tasks you will be asking them to complete it often paints a different picture.

I have a friend who is a loan officer and business is booming for him. He is extremely busy and works at least 70 hours a week but he is doing great and makes really good money. He is starting to bump up against the wall of what he can personally get done in the business. His lead time is starting to slip. He isn’t able to devote the necessary energy to new leads to tie them down, etc.

He runs his own branch and has a lot of autonomy and he has the freedom to staff his office based on his needs. We began chatting about this and he mentioned to me “I have to hire someone experienced in the home mortgage industry but that is expensive as the average loan officer in town makes about $70k a year.”

I asked him why he needed experience and he told me that the job is complicated and an inexperienced person wouldn’t understand how it all works and that he doesn’t have the time or energy available to train a new person.

So I had him track his time at work for one day. He used the app aTimeLogger and we set up the categories. The top task for the day, which he spent roughly 3 of his 9 working hours doing, was “Compiling and completing loan applications to send to underwriting”. This involves a lot of phone calls, emails and dealing with customers to get all the required tax returns and bank statements and the like ready to send off.

So I asked him more about the process and we came to the conclusion that most of it is busy work. I asked him how long he would need to spend with me personally to make it so that I could help him and do 90% of the required stuff for that task without asking questions.

He said if we went through 2 loan applications together in about 3 hours I could probably do enough to be a really big help and after about a week of experience and questions I’d probably have 100% of it down for 95% of his applicants.

He makes $250k a year. The hardest part of what he does is make the sale. He is on the phone and in meetings with people earning their trust and convincing them to trust him with the huge life event that is financing a home.

But he only spends about 25% of his time on the phone with leads and drumming up new business. The rest of it is busywork that he could delegate if he only simplified the ask and had the employee who makes $40k a year do a lot of it. It doesn’t make sense for him to hire a high powered loan officer because he doesn’t need help drumming up business. That is his strength. He needs help with the busywork and an inexperienced person would prove very valuable to him!

4. Build out systems and a structure for your employees to follow

Hiring your first employee is very uncomfortable. It’s scary. The anxiety in fact can be so crippling that many many people can’t take the leap from freelancer to entrepreneur because they just can’t deal with the risk.

So what is the goal of hiring your first employee? TO MINIMIZE RISK.

When you are hiring your first employee you need someone willing to follow your lead and follow your process. You need someone who will listen to you and will do as you tell them to do.

It is VERY RISKY to hire someone and let them do their own thing with little structure. You do not know the person. It’s as simple as that. You are trusting your business in the hands of someone that you do not know. You are trusting them to take care of your customers. To operate your equipment. This is a big deal.

This is why so many people gravitate towards hiring and partnering with their friends. To try to mitigate risk of the unknown. I have done this and it can be great but more often than not it causes problems. That’s why you need a system and a stranger willing to follow that system.

Employees want structure and processes. You want structure and processes. At this point in the early days you know the best way to do things because you have been out doing it. You want someone who is willing to do it your way.

Now that you have a simplified job description its time to build the guide. If this happens, do this. If that happens, do that. There will always be surprises and later we’ll deal with how to help employees get better at making their own decisions but for now you want to remove all doubt and make that person an extension of you.

5. Get your compliance in place before an employee starts the work and be aware of the extra cost.

Hiring employees is expensive and requires a good deal of administrative work.

While paying an employee under the table is tempting it is illegal and risky. You need to get insurance and register with the required local, state and federal agencies for tax purposes.

Insurance first.

You need workers compensation insurance in place to cover you and your workers in the event that an employee gets injured on the job. This is often paid as a minimum at first but as you grow it is directly correlated with total payroll as a percentage. This is handled by a state agency so it varies by state. Sometimes you are required to purchase this insurance through the state. In other states you have the option to go private or purchase through the state. If you are a young company in a high risk industry you are often left with only the state option.

The more risky the job the higher the percentage. Roofing has the highest in most cases. Nearly 40% of the wage can be paid in the form of workers compensation insurance. More often this is more like 15% for most labor jobs and 5% for most clerical office/computer jobs.

Each employee in your company will have a different “class code’ based on the work they do. The code determines the cost of the workers compensation. Make sure you differentiate between your customer service reps and your laborers so you don’t have to pay for high risk workers compensation on your clerical staff or management.

You will have a payroll audit and they will determine your final liability based on your class codes and your records. Keep good records – more on that soon.

Unemployment insurance (FUTA) is next and its taxed at both the federal and state level. This is a complicated system and your rates go up or go down based on employees claiming unemployment after they leave your company. It is usually about 1% of wages up to a certain amount but can be 6%. Here is some more information. Expect this to be no more than $500 per employee per year and often much less.

Disability insurance is another one related to payroll as a percentage. In some instances an employee is required to opt in and get money withheld for short term disability. Long term disability is covered by the employer as a percentage depending on the state it is between 1-3%.

Liability, property, auto and umbrella insurance. You need these things to protect your business and personal assets in the event of an accident. Generally 3 different policies. More here.

Payroll taxes next.

FICA (Federal Insurance Contributions Act) taxes are taxes based on payroll that fund social security and medicare. The total liability that you need to submit to the government is 15.5% of wages. You as employer pay ½ and the employee pays ½ and their half is withheld from their payroll. You need to register with the IRS so you can pay and withhold FICA taxes.

You are required to pay 7.75% of the employees wages on top of their standard earnings in the form of FICA.

How much will this cost? It depends on the industry but I’ll give you an idea based on my own experience in the moving and storage business.

We pay our laborers $15 per hour in most cases. We’re in a 33% workers compensation bracket in one of our states. We pay 7.75% FICA. 2% disability and 2% unemployment (after a few claims per year).

That is an extra 44.75% on top of the hourly wage for a total of $6.71 extra per hour per employee. That turns the $15 wage into a $21.71 liability. And whats more the employee’s $15 per hour turns into only $13.84 after FICA and about $10.50 after taxes are withheld.

It’s tempting to pay your employees cash or treat them as independent contractors and just send them a 1099. This isn’t the right way to do business. These taxes go back to the workforce over time and provide valuable safety nets for everyone involved. Look at it as the cost of doing business and operating in such a stable political and economic environment. Price it into your services and follow the rules so you can grow a healthy scalable company.

I recommend an online payroll service. Not only do you need to have all of your ducks in a row on insurance and taxes but you also must have an I-9 form and a W2 filled out for each employee or you are at risk. I use Gusto and they let me manage it all from my computer. They do the withholding. They do the reporting. They help me efficiently file all the necessary forms. They even let my employees fill out their forms from their phones so I can remain paperless.

So on a $15 per hour wage our cost is $21.71 per hour and the employee only sees $10.50 in his bank account.

Don’t forget the background checks and drug tests as well that run a few hundred dollars to onboard a new employee. Plus the 10 hours paid training time for each employee. Plus the time we spend interviewing 10 employees for every 1 we hire. Plus the time and money we spend recruiting employees. Plus the time and money we spend building training systems and videos to teach them the work.

Add that to the fact turnover is common in hard labor intensive work and the average employee will only last 4 weeks and the total cost per hour rises to about $30. Thats 2x the offering wage and nearly 3x the take home pay.

So what does this mean?

See step 1.

Get comfortable charging more for your services. Ever wonder why a moving company bills you $50 per man hour but only pays their employees $15? It’s because they have to do it to make any money.

Do things right so you can deliver a consistent service and then get comfortable charging more for your services so you can build a healthy company ready for growth.

Don't know where to start?
About Me

I started the Sweaty Startup in December of 2018 because I believe the Shark Tank and Tech Crunch culture is ruining the real spirit of low-risk entrepreneurship.