How much should I pay a previously salaried employee to stay on as a consultant?

Question

I just bought a company yesterday that has been run for the last six years by the owner's sister ("Sue"), whom I would give the title of "Business Manager". It's a small business, but we do government work, so there's a fair amount of paperwork in addition to routine accounting through QuickBooks. I'd like to assume Sue's job because the company has greatly downsized since its heydey when a full-time Business Manager was needed. Her job is something I can do.

Sue has been making a salary of $38,188 with no additional benefits. Because there will be some turnover, and because I'll need her to do a handful of things in addition to answering my questions, I'd like to offer to keep her employed at an hourly consulting rate for a short period of time, say 30 days from today. Realistically, I would expect her to record no more than 10 hours per week for the next month, as part of the transition.

I don't want to lowball her unfairly (she's done a great job heretofore), but I'm on a serious budget and cannot afford to overpay her. What hourly rate should I offer her? I originally considered dividing her salary by 2080 (hours in a year), but ~$18/hr seems low. Any advice would be appreciated.

Answer 1

I have seen that many companies offer full-time rate as 50% of their real rate.

Based on this, it looks like you should offer her $36/h. And she should be happy with it.

If you cannot afford $36, then go a bit lower until you reach the mutual satisfactory rate.

However, many people will tell you that you are a business and not a charity. So "low" is not low if the other side accepts it. If the other side declines the offered rate, then you negotiate for the best rate FOR YOU, not for the employee. In reality, this rule is stretched based on the demand and need. If someone can do the job for $18, then you should offer that rate to her as well. If you really need her, then offer her $36 or lower so you are sure she will do the work, but you are not out of the budget.

Answer 2

In all honesty, engaging "Sue" at a rate based on her previous salary is probably low-balling her (unless she was paid an insanely, extremely over-market wage).

Benefits or not, Federal 'payroll' taxes are 21.3% (13.65 employer paid) and State taxes are not reflected in the salary, not to mention the additional tax reporting problems "Sue" will need to manage at the end of the year.

What you are doing is hiring a temporary Business Manager (for which there is a going consultant market rate) who is fully trained in all the tasks (which would drive you to the high end of the market rate) and has an intimate knowledge of the government regulations and accounting involved in your exact business operations (which would command a premium on the market rate).

If you are trying to be fair in what you pay, it should be in line with the market rate in your particular market. Check with the local temp agencies and see what they would charge. It could be that $36/hour is fair, but as a contract I would state it in terms of $1440 for a 4 week engagement of 10 hours a week. That seems awfully darn low to be tying up a highly specialized consultant for a month.

Ask "Sue" what she would want. Maybe offer to keep her on part-time for 20 hours/week for a month (basically the "50% of her real rate" theory), or 10 hours a week with a $1K or $2K severance bonus if she sticks around to the end of the month (still within 36/hour). Those options would save both of you paperwork.

Somewhere between what she wants and the value you (and the market) place on her service you can find an adequate rate. It really doesn't need to reflect the previous salary; that's just the lowest point you can fast-talk someone into accepting.

Answer 3

Rather than getting caught up in a boatload of paperwork, find a reputable temporary-services agency and pay the agency to pay Sue at a given rate. Your cost will be Sue's hourly rate plus a markup rate for the agency that will cover their mandatory Social Security contribution and put a few dollars in their pocket for the convenience. Typical markup rates would be between 12%-50%. At the end of all this, you just pay the agency without having the burden of calculating payroll taxes and making payments to the state and the fed, and worrying about W-2's next year.

That said, the $18 rate is absolutely appropriate but you might be nice and bump it up to $20. A marked-up $18 will cost you $20-$27/hr, and a marked-up $20 will cost you $22-$30/hr.

This might be the simplest approach for you to not spread yourself too thin.

Answer 4

I must endorse that you employ "Sue" (as she has all prior knowledge needed by you until you can handle the big hassle of government paperwork) through an employment agency and take the cost hit. An "Employee" (part time or full time or casual) will give you major administration problems while to an employment agency they are routine.