You can afford it when the new employee brings at least twice his total cost to the business. Total cost isn't the net pay you hand him. It's the gross pay, plus the contributions you pay as the employer, plus the time until the employee becomes productive. When you calculate it that way, the decision becomes much clearer.
Many employers start the calculation from the net pay. That's where the mistake begins. Net pay is based on gross pay, because income tax on employment is withheld from the employee's pay. On top of gross pay, the employer's social security and health insurance contributions are added. These are paid out of your pocket, not from the employee's pay. You can find the exact rates on our tax pages, because they change with government decisions and should always be viewed as up-to-date.
Then there's the cost that doesn't appear on any invoice. The new employee needs a few weeks or months to adjust. During that time he's paid in full but only partially productive. Someone on the team spends hours training him. That, too, is a cost of hiring.
Daniel Kahneman, in Thinking, Fast and Slow, shows that people regularly overestimate the outcomes of their decisions. The owner who hires only sees the best-case scenario. A cold, hard calculation of the full cost is the simplest defense against this overestimation.
The practical rule is this. A new employee must bring to the business at least twice his full cost, in additional sales, in freed-up time that you convert into sales, or in work that you're currently paying more for externally. Why twice? Because the employee doesn't just support himself. He also has to cover his share of rent, utilities, equipment, and the mistakes that happen along the way. If the numbers look tight on paper, in reality it will lose money.
A bar-restaurant in Tirana is looking for a second bartender. The gross salary offered is 60,000 LEK per month. Employer contributions are added on top of this. For illustration, let's assume that the total monthly cost, including contributions, comes to around 70,000 LEK. The exact figure depends on the applicable rates and can be easily calculated together with the economist.
The double rule says that the new bartender must bring in at least 140,000 LEK in value per month. If the bar's average contributing margin is 200 LEK per order, the bartender must handle about 700 additional orders per month, or roughly 23 more orders per day. Now the question becomes concrete. Does the venue have a flow of customers it's losing today because of long wait times? If so, the position is kept. If not, perhaps the solution is an expanded schedule with the existing staff.
In the Resource Center you'll find a short checklist for employment. It includes calculating the full cost, the dual-test requirement, and the legal steps for the employment contract. A written contract and the employee's declaration before starting work are mandatory steps, and you can find them explained in our section on the Labor Code.
The total annual cost of employment is calculated as the annual gross salary multiplied by (1 plus the employer's contribution rate), plus recruitment costs, plus training costs, plus workplace equipment. In practical modeling, partial productivity for the first months is also added, typically 50% to 70% for the first three months, depending on the sector. The decision threshold is expressed as the expected incremental contribution margin divided by the total annual cost, with a minimum threshold of 2.0 according to the two-rule. For sensitivity, the scenario in which incremental revenues fall to 25% is tested. If the ratio falls below 1.0 in that scenario, the decision is postponed or remodeled.
The cost is calculated using the same logic: gross wage plus contributions plus adjustments. Part-time means lower cost, but also lower capacity. The twofold test applies equally.
Working without a contract or declaration is a violation and an unnecessary risk. The probationary period is provided for in the employment contract. To see how it works, check our section on the Labor Code.
If you'd like to run this calculation with your actual figures, we can go over it together with no obligation. Write to us at Contact page or see our packages at offer.
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