Breaking Down the Costs of a Blended Workforce Model

The modern business landscape is rapidly evolving, reshaping traditional notions of workforce composition. Recent events have highlighted the need for a workforce that provides agility and access to in-demand skills.

In an era where business agility and innovation are paramount, the concept of a blended workforce has proven invaluable. Companies are enhancing their operational flexibility, accessing specialized skills, optimizing costs, and fostering a culture of diversity and expertise. 

This approach helps organizations swiftly adapt to market changes, scale their operations dynamically, and maintain a competitive edge.

Weighing the Costs of a Blended Workforce

Embracing a blended workforce has evolved from a trend to a strategic imperative for achieving resilience, innovation, and sustained success in today’s dynamic business environment.

By hiring talent globally, organizations can access top skills from anywhere. A CareerBuilder survey found that 42 percent of organizations plan to use more contract workers in 2024.

A blended workforce can save organizations millions in expenditure while maintaining a competitive advantage by providing skilled talent on demand.

Let’s break down the costs of engaging W-2 employees and contractors.

Breaking Down the Costs of W-2 Employee vs. Contractors

In most industries, labor is the most significant cost on a P&L. Therefore, it’s essential to dive deeper into the cost comparison when managing a blended workforce.

Financial analysis is crucial for decision-making. Organizations need to understand what cost-efficient teams look like for growing businesses. There are advantages to using contractors or consultants, especially in the early days of a business or initiative when owners are figuring out what skills they need or needing less than part-time help. However, W-2 employees can be more cost-effective in the long term if there is an established need.

Comparing Costs: W-2 Employees vs. Contractors

Imagine you’re building a development team and need top software engineering talent quickly. Your team lead considers a contractor who charges $100 per hour, equating to an annual salary of over $208,000 based on a 40-hour work week. In contrast, the team believes they can hire a great developer as an employee for $150,000 a year or less.

Assume your team lead finds an employee for $145,000 a year. On an hourly basis, the team calculates the contractor will cost $100 per hour, whereas the employee will cost around $70 per hour.

That’s significant savings… or is it? This calculation fails to account for the indirect costs of hiring an employee, such as benefits, payroll taxes, overhead, and general office expenses.

“When we break it down for companies, they’re like, ‘Oh my gosh, a $100 bill rate per hour, that seems like a lot.’ And you work out the budget and the total cost, but then you say, ‘Okay, well that position, if it worked full time, break it out to a salary, then benefits, then PTO, then work hardware and equipment.’ There is a lot behind the scenes that I don’t think a lot of managers think about when it comes to the cost associated between the two,” explains Vinnie Levine, Managing Director at Cypress HCM.

The total cost of an employee includes the base salary and other expenses incurred to hire them. Typically, an employee costs 1.9 times their base salary. To accurately calculate the total cost per employee, multiply the base salary by 1.9.

Returning to our example, the employee’s real hourly rate isn’t $70 per hour but closer to $130 per hour.

Other Financial Factors to Consider in a blended workforce model

In determining the cost of your blended workforce, consider the following:

• Location: The location of your business affects employee compensation due to different state and local employment taxes, cost of living, and market demands.
• Industry: Different industries have varying employment norms. For instance, industries like insurance and software development often require additional benefits, impacting employee costs.
• Company Size: Larger companies may have lower employee costs than small businesses and can afford higher compensation, while small businesses may struggle to offer competitive rates, leading to higher turnover rates.

• Market Conditions: The law of supply and demand in the employment market can affect employment costs. Companies may adjust compensation packages based on supply and demand, offering competitive benefits to attract top talent with rare skill sets.
• Education and Role: Individuals with rare skill sets, education, and experience can demand higher salaries. Most companies offer competitive compensation and benefits to recruit and retain them.
• Legal Considerations: Misclassifying workers as contractors instead of employees can lead to penalties, back taxes, and legal issues. Engaging a firm like Cypress helps ensure compliance with labor laws and proper worker classification, protecting your business.

Determining the Right Talent Resource

It’s essential to consider the cost implications of hiring employees, engaging contractors, or going contract-to-hire. Each option has its advantages and can be justified depending on specific circumstances.

Contractors  – When Does It Make Sense?

• Contractors are often suitable for short-term projects requiring specialized skills or expertise.
• Engaging contractors can be beneficial during peak periods or when additional resources are required temporarily.
• Contractors often bring unique skills or specialized knowledge that may not be readily available within your existing team, allowing you to access a wider talent pool and industry-specific insights.
• Contractors can hit the ground running without the need for extensive training, allowing them to contribute immediately and efficiently to your projects.

Employees – When Does It Make Sense?

• Hiring employees is suitable when you need consistent and ongoing support for your core business operations.
• Employees provide stability, continuity, and long-term commitment, which can be essential for core functions and team collaboration.
• Building a team of employees fosters collaboration, knowledge sharing, and the ability to work towards common goals.

Contract-to-Hire – When Does It Make Sense?

• Contract-to-hire is ideal when you need to fill a position quickly and can’t afford a lengthy hiring process.
• This approach is beneficial when you’re unsure of your long-term needs and want to evaluate a worker’s fit before making a commitment.
• Contract-to-hire can be a cost-effective solution when budget resources are limited, allowing you to manage expenses while still addressing immediate staffing needs.

Maximizing Workforce Efficiency: Your Path to Smart Hiring

Understanding the exact cost of your workforce is crucial for budgeting, estimating costs, predicting profitability, and making informed financial decisions that drive business growth.

Every company and situation is unique, so there’s no “one size fits all” answer. However, being aware of the factors involved will empower you to make the best financial decisions for you and your team.

Ready to optimize your workforce strategy? Connect with our team of experts to unlock a world of possibilities for your blended workforce needs and propel your business forward.