Hiring an employee with performance based pay

11 Replies

My main strategy so far has been BRRRR and like many people I have been the cog that makes the machine turn. So, with that there are limits to how fast I can accomplish things. I've been pondering how to adjust my role so that I can so from basically being self employed with my BRRRR investing to actually having a business that will accomplish work with or without me.

So, I have been pondering hiring an employee. Someone who has handyman skills and who could do rehab/handyman work, a little project management and GC type work as well under my general supervision.

I have also been thinking of how I want to structure pay. Some of the work will be lower value handyman work and some higher value work. Also, since I will only generally be able to supervise I'd like pay to be somewhat performance based. I was thinking I would pay an hourly rate at a handyman rate ($10-15/hr which is normal in my location), but give them a bonus on each completed rehab. I think a percentage based on the ARV - (Purchase Price + Rehab Costs + Holding Costs + Any Debt Service). So, basically a cut of the equity created through the rehab itself. The idea is for the bonuses to be fairly substantial and payable when I refinance each property.

So, a couple questions:

1. What experience have people had hiring their first employee?  (What kind of role did they fill for you?)

2. Any thoughts on my idea to pay an employee based on performance?

1. I have hired many people in my life.  I would have to say the first one was a handy person.  I made sure they understood what contract labor meant and that they had to pay all taxes and social security themselves.  

2. Pay for any job is subjective. In Michigan you can get a handyman to come out and paint your house for 15 an hour, In Chicago I doubt you can get anyone for less than 30 an hour.  Performance based pay is usually a percent of the purchase price or a percent of what the value is. 

@Michele B. , I was thinking to hire them as an actual employee not a self employed contractor

The idea was to develop someone who could manage in a hands-on way a lot of the rehab work. In order to pay this person fairly and make them almost a partner in the rehabs, I was thinking to give this person a cut of the value they create in the rehab.

Originally posted by @Kevin Sobilo :

@Michele B., I was thinking to hire them as an actual employee not a self employed contractor

The idea was to develop someone who could manage in a hands-on way a lot of the rehab work. In order to pay this person fairly and make them almost a partner in the rehabs, I was thinking to give this person a cut of the value they create in the rehab.

 If you hire them as an employee you have to pay un-employment insurance, of course you will have to pay for the company side of all the taxes, filling out schedule B, 940,941, and all the state forms, you will have to go through an audit once a year for the unemployment taxes (only taxes a few minutes but you need to know what you are doing).

For one employee not usually worth all the headache.  Doing payroll for one person will take you a few minutes but paying all the taxes to the right entity will take longer so figure about 2 hours a payroll.  Also, realize that if you pay them 20 an hour that you will end up paying 24.00 an hour with taxes and then add your time in payroll and the unemployment insurance. At the end of the year you also have to do a w-2,w-3 forms by the last day in January. 

Also, don't forget if you are giving them any other benefits like health care or vacation or sick pay, or 401k that will cost you more. 

You would be way ahead if you paid them 25.00 an hour as a 1099 or independent contractor.

It is all a decision you have to make about time and the value of the money.  

 @Michele B. ,   Yes, I do understand there is extra overhead in terms of time and cost with having an employee, but an employee you develop with the business could be MUCH more valuable than a contractor. Also, you cannot manage a contract employee as well or as much as an employee. An employee would be looking to grow with the business and have motivations for a small business to do well so they can do better unlike a contract employee. Keep in mind Im not just looking for a laborer. I'm thinking of someone who can manage a rehab but also have handyman level skills.

Also, keep in mind that almost no business intends to hire just one employee and every business starts by hiring  one employee.

@Michele B.undefined

Originally posted by @Kevin Sobilo :

 @Michele B.,   Yes, I do understand there is extra overhead in terms of time and cost with having an employee, but an employee you develop with the business could be MUCH more valuable than a contractor. Also, you cannot manage a contract employee as well or as much as an employee. An employee would be looking to grow with the business and have motivations for a small business to do well so they can do better unlike a contract employee. Keep in mind Im not just looking for a laborer. I'm thinking of someone who can manage a rehab but also have handyman level skills.

Also, keep in mind that almost no business intends to hire just one employee and every business starts by hiring  one employee.

I get what you are trying to do.  IF you are set on that you want them to grow with you then you can set a number and a dollar figure for this position.  Property managers get 10% of each property, you are looking for this person to overlook the work on your properties and manage the contractors when needed.  I would say you need to pay on a % scale with a base pay.  I would start with a base pay per hour (I don't know your market  so look up what people get per hour as a handyman in your area then add 5.00)  plus benefits (this will let them know you are serious about them being paid well right from the start). Then I would add the commission parameters.  You could give the employee commission based per job or per week or just about any way you want to.  Maybe a percent of net income in your business. 

Good Luck

Don't forget that as am employer you will also have to carry a workmans comp ploicy and that adds up to 30% of the pay you are offering.

What are you goint to do when you have to task to be completed?, pay someone to stand around?

I would say hiring a low cost contractor is the way to go with this. You cannot hold an employee liable for quality fails where as you can with a contractor and you have to pay for your own liability insurance whereas contractors carry their own policy. 

With employees nothing can compel you to pay bonuses but also nothing will let you not pay for poor quality work. An employee gets paid no matter what.

@Kevin Sobilo your assuming that your employee will be motivated by money. Most unsuccessful people with $500 to their names are going to do very little to get more money despIte what they say. I have found trying to motivate most handymen with percuInary incentives to be a fools errand

@Gilbert Dominguez , workman's comp in my state costs about 1.51% I believe. I am already licensed and insured as a contractor so that I can pull my own permits. So that is not an issue either.

I do believe you can fire an employee for poor quality work and unlike a contractor where you may have paid 1/2 up front, you have only paid them for the hours they worked.

With regard to paying people to stand around, my thinking is to start with a part time employee with the intent of within a moderate amount of time ramping it up to a full time employee and perhaps 1-2 additional part time employees. So, there will be flexibility when it comes to the work and the hours to be worked.

@Steve B., I'm not looking for an "unsuccessful" person. I'm looking for a person who wants to become successful. I'm not looking for a drunken stumble-bum type handyman. I'm looking for someone with handyman level skills who wants to do more and is capable of doing more including some GC and project management type work.

@Kevin Sobilo , My only experience as a GC and with workmans comp is in California so yes perhaps in your area things work a lot  different and cost different as well. 

Of course if you employ someone you can fire them but what i mean is you cannot take an employee and make him do something over and not pay them for their hours and you cannot sue them either. It is also good that you are a licensed and insured contractor. I do not remember reading that in your original post. 

Picking or even advertising for someone who is new and wants to become a project manager or someone working toward qualifying for their GC license might be a good candidate . Obviously you have experience as an employer already so you should not have a problem finding who would be a good employee that fits your needs.

@Gilbert Dominguez , I didn't mention that I was licensed and insured as a contractor. I wasn't thinking when I wrote the original post that it was pertinent, but of course it is.

Here is the source I used as a quick guide for the cost of workmans comp insurance.

https://www.insureon.com/insureonu/costs/workers-compensation

 I don't think anywhere would or could approach 30%. Perhaps you are thinking of the total additional cost for an employee (vacation, retirement package, paid days off, insurances, payroll taxes, etc). All those items together might be around 30% above the hourly rate.

I'm not an experienced employer, so that is in part why I was looking for some feedback from people who may have taken these kinds of steps.

Kevin,

There is another consideration on whether or not to hire this person as a W2 employee or as a 1099 subcontractor.   The IRS, State Revenue depts., & Workers Comp. insurance companies all have "Tests" to determine if someone is truly a subcontractor or an employee for Taxes or for Insurance.  Some of those things are:

- who directs the work

- how are they paid (per job vs Hourly/Daily/Monthly)

- do they work for others

- is there a contract in place

The list continues and varies based on who is checking (IRS has different standards compared to Ins. cos.). 

If you have Workers Comp. for your business, your agent should be able to help.   Your WC policy is auditable and if the subcontractor does not have WC himself, you may end up being charged for him anyway.  If you don't have it, you will need it (even if the person is a 1099 it would be advisable to have it).

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