Direct vs indirect hiring costs: What’s often overlooked

Hiring doesn’t end with posting a job or making an offer, nor do the associated costs.

While some expenses, like job ads or assessment tools, are easy to spot, others quietly drain your budget in the background. These hidden costs, like lost productivity, training time, or a bad hire, often go unnoticed but have a big impact.

That’s where understanding direct vs indirect hiring costs becomes crucial. In this blog, we explain what each one means, why they matter, and how you can manage them to make better hiring decisions.

Summarise this post with:

What are direct and indirect hiring costs?

Direct hiring costs are the actual, measurable expenses a company incurs when hiring someone for an open position through internal hiring practices without using external recruiters or agencies. They’re predictable and often fixed, making them easier to plan for.

Indirect hiring costs are the less obvious, harder-to-quantify expenses tied to the time, resources, and organizational impact of hiring. These don’t appear as line items in your accounting software but can hit your bottom line just as hard.

The formula for calculating direct and indirect hiring costs is:

Total hiring costs = Direct hiring cost + Indirect hiring cost
Cost-per-hire = Total hiring costs / 2

Examples of direct costs of hiring an employee

Job posting and recruitment costs: These are hiring costs associated with sourcing, resume screening, and attracting potential candidates through job portals, boards, career fairs, or other marketing efforts to reach potential candidates. 

Screening and pre-employment tests: Conducting certain background checks like drug screening or different pre-employment tests to verify candidates’ history adds to direct hiring costs.

Employee documentation and legal compliance: Companies may spend revenue to check if a new hire is legally allowed to work, get work permits or visas if needed, and follow all the legal rules during hiring.

Onboarding and training: These are the costs of helping new employees get started. It includes orientation, training materials, tools, and sometimes paying for external courses or professional development.

Employee referral programs: Many companies offer rewards or bonuses to employees who refer someone who gets hired. It’s a way to encourage team members to bring in good talent.

Recruitment software or tools: Employers may use pre-employment platforms for skills assessment, such as Testlify or resume screening software, to smoothen the hiring process. As these come with subscription or licensing, such tools fall under direct hiring costs. 

Internal HR team salaries: Your in-house recruiters or HR team spend time sourcing, screening, and interviewing candidates. A portion of their salary is essentially a hiring cost.

New employee signing bonus: A signing bonus is a one-time payment given to a new hire when they accept the job offer. Since it’s a fixed, upfront payment tied directly to the hiring process, it is considered a direct hiring cost. This cost is clearly recorded in the company’s financials and adds to the total cost-per-hire.

Examples of indirect hiring costs of an employee

The average indirect hiring cost varies among industries, but mostly, it ranges from 15-40% of an employee’s base salary. Below are some examples of the cost of indirect hiring.

Productivity loss: This indirect cost happens when current employees have to train or support new hires. 

During the probation or onboarding period, team productivity can dip because experienced employees must divide their time between their regular tasks and guiding the new team member. 

This temporary slowdown affects overall output, even if the new hire eventually becomes fully productive. 

Also, when a role stays open, the work doesn’t disappear. It either piles up or gets distributed among the team. This slows down projects, affects deadlines, and can impact customer satisfaction. 

Time spent looking for hires: Hiring a new employee is not done in a day. HR department and recruiting teams spent their time and effort reviewing resumes, conducting interviews, assessing candidates, etc. 

All of these fall under indirect costs. It affects not just the HR team but top performers who participate in the hiring process, such as panel members or interviewers. 

Decreased team morale: When teams are understaffed or overworked because of a long hiring process, it affects morale. Employees may feel stressed, unappreciated, or frustrated. Over time, this can lead to disengagement or even resignations, creating more vacancies and costs.

Increased administrative tasks: Tasks like setting up payroll, benefits enrollment, ID card issuing, and updating personnel records are a part of hiring new employees, and these are indirect costs since these take up time and resources from HR professionals. 

Bad hire: If the hiring process is rushed or potential red flags are missed, you may end up with a candidate unfit for the job or work culture. 

Replacing a bad hire can cost up to 30% of their annual salary. Adding to this, the time and effort to start the process all over again. 

Direct vs indirect cost of hiring employees: Differences

Direct hiring costs are expenses directly related to the recruitment process, like background checks, job posting fees, employee documentation, etc.

While indirect hiring costs are less tangible, quantifying expenses related to the time, productivity, and resources spent during hiring is often harder.

Are salaries indirect or direct costs?

Salaries are usually considered indirect expenses because they are part of the general costs of running a business. The company must pay its employees no matter how many products or services they sell. 

These salaries and workers keep the business running but are not directly tied to the product or services. This is why salaries are indirect costs. 

But then, if employees aren’t working, how will a company’s product or service flourish? Doesn’t that mean it is a direct cost?

Well, not exactly. In a broad sense, all salaries help create products or services. However, in accounting terms, not all salaries are treated the same.

Consider if you hired a painter for $20 to color a chair. The chair will cost $20, so it becomes a direct cost. 

But if you hire a receptionist for $650 a month, how much of that salary goes into each product or service your company sells? Not really. That makes it an indirect cost.

Here is another twist.  Suppose an employee is hired just for one project or specific task (like a recruiter hired only to fill roles). That part of their salary can be a direct cost because it’s directly related to a specific hiring activity.

What is the average cost of hiring a new employee?

Hiring in 2025 is not cheap or easy. SHRM states that the average cost of hiring a new employee is $4700, but it can range anywhere from $2,000 to $20,000. There is a clear 14% increase in cost per hire from $4129 in 2019 to $4700 in 2023. 

Many factors influence hiring costs, such as position level, industry, location, urgency of the hire, company-specific factors (Visa, etc.), and qualified candidates’ availability.

Additionally, factors such as the speed of hiring and the quality of candidates hired can directly impact your cost per hire.

Calculate your hiring expenses instantly with our free Cost Per Hire calculator.

This cost also covers both indirect and direct hiring costs like recruitment expenses, onboarding costs, and productivity loss during the probation period. Both direct and indirect costs play major roles in the fees associated with hiring.

The hiring cost is further divided into hard and soft factors to better understand this. 

The hard costs of hiring are the clear and unavoidable expenses involved in new hires. These include the costs of sourcing candidates, selecting the right person, and onboarding them. 

On average, these hard costs come to about $4,700 per employee. In addition, the extra expenses related to running the HR department and providing workers’ compensation will also fall under this.

Soft recruitment costs refer to both direct and indirect expenses that are less obvious but still significant. These include the time current employees spend helping the new hire, the internal HR team’s efforts during onboarding, and the temporary drop in productivity while the new employee is learning.

Even though soft costs are harder to measure, they can raise the actual cost of hiring by 2-3x, whether you’re hiring a full-time or part-time employee.

Note: Hard costs are direct hiring costs, and soft costs are mostly indirect hiring costs.

But just be mindful that some soft costs may still be direct, just not as easy to calculate or track.

How to minimize hiring costs? (Both direct and indirect)

Costs of hiring are shooting up for multiple reasons, such as the changing economy. Hence, companies are rethinking how to cut hiring costs without compromising the quality of hires.

Below are the top strategies to reduce your cost per hire.

Streamline the recruitment process

One of the most effective ways to reduce hiring costs is eliminating inefficiencies in your recruitment pipeline.

Start by ensuring every role has a clear, detailed job description accurately reflecting responsibilities, required skills, and expectations. This helps attract the right candidates and avoids wasting time on unqualified applicants.

Testlify offers 500+ job description templates. Don’t want to go through them? Try our free AI job description generator and create DEI-optimized descriptions in seconds. 

Next, optimize your job postings by using right keywords for better search visibility and posting on the platforms that bring the highest quality applications (like LinkedIn, niche job boards, or employee referral networks).

Use the Applicant Tracking System (ATS) to automate repetitive tasks like resume screening, interview scheduling, and updating candidate status. This saves time, reduces human error, and keeps candidates engaged, speeding up the overall hiring cycle.

Read more: HR hiring cycle: steps, tools and best practices

Continuously improve internal hiring workflows

Administrative hiring tasks such as writing job descriptions, posting roles, coordinating interviews, and managing onboarding documents can consume hours of productive time. These tasks often fall on HR teams or hiring managers, juggling other responsibilities.

Read more: Employee onboarding checklist: Process & templates

To minimize this cost, HR standard operating procedures (SOPs) for each hiring stage must be implemented. For example, use templates for job descriptions and offer letters, create pre-written onboarding email sequences, and use shared calendars to streamline scheduling.

More importantly, adopt a mindset of continuous improvement. Collect feedback from new hires about their experience and analyze data from previous hiring cycles.

Look at metrics like time to hire, cost-per-hire, and offer acceptance rates to identify what’s working and needs to be adjusted. Small improvements, when repeated, can lead to big cost savings over time.

Use Testlify’s free average time to hire calculator to determine the average time to fill a position.

Invest in talent pipelines

Instead of starting from scratch every time you need to fill a role, build and maintain a talent pipeline. It could be a pool of pre-qualified candidates who have already shown interest in your company.

This can include past applicants, employee referral programs, or candidates who engaged with your employer brand through content, webinars, or networking events.

Having a warm pipeline can significantly reduce time-to-fill and job advertising costs while improving the quality of hires. Tools like candidate relationship management (CRM) systems can help you maintain communication with these individuals until a relevant opportunity arises.

Make use of internal mobility

Hiring from within not only saves on sourcing and advertising costs but also shortens the onboarding and training time. 

Employees already understand your culture, tools, and workflows. Encourage internal applications and implement clear career progression frameworks so employees know how to grow within your organization.

It’s often more cost-effective to upskill or promote existing employees than to onboard new ones from scratch.

Use skills assessment tools

Relying on gut feeling often leads to costly hiring mistakes. Instead, use skills assessment tools like Testlify to make data-backed hiring decisions. Testlify offers 3000+ tests to assess over 4000+ roles, including technical and non-technical ones.

Check for a platform that offers anti-proctoring features and advanced reporting capabilities.  If you are hiring globally, ensure the platform offers multilingual support. Testlify checks all of these boxes and more. 

If this sounds like something you want to explore, sign up for a free Testlify trial today.  

Note: Additionally, find out what works for you. You can redirect that budget to higher-performing sources if a certain job board consistently delivers low-retention hires. If candidates from referrals tend to perform better and stay longer, double down on your referral program.

Strengthen your employer brand

Candidates today are researching companies before applying. A weak employer brand can increase your cost per hire because fewer qualified candidates apply and more drop out.

Invest in employer branding assets like a compelling careers page, employee testimonial videos, behind-the-scenes content, and social media presence.

When candidates feel aligned with your mission and culture, they’re more likely to apply, accept offers faster, and stay longer, ultimately reducing direct and indirect hiring costs.

Outsource when it makes sense

If you’re hiring for specialized or temporary roles, working with a trusted staffing agency or using freelance marketplaces can sometimes be more cost-effective than managing the entire process internally.

Ensure the outsourcing partner aligns with your budget, timelines, and quality expectations.

Overall, it may be said

When comparing direct vs indirect hiring costs, many companies focus only on obvious expenses like salaries or job postings. Direct hiring costs more than indirect hiring, typically because it’s directly linked to the recruitment process. 

But what’s often overlooked are indirect costs, things like the time your internal team spends reviewing resumes, conducting interviews, onboarding, and training. There’s also the hidden cost of a bad hire, which can affect productivity, morale, and even client relationships.

Direct hiring makes the most sense when you’re building a long-term team, have the resources to manage hiring in-house, and want full control over the process. It’s ideal for roles that are core to your business and need cultural alignment.

Outsourcing, as explained, is a smart move when you need to hire quickly, handle seasonal spikes, or find highly specialized talent. It also helps when your internal HR team is stretched thin, or reducing time-to-hire is a top priority.

The best approach is to look at the bigger picture, not just the cost of hiring but the time, risk, and impact on business outcomes.