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The True Costs of Terminating an Employee

Human Resources
Article
06/19/2014

Terminating an employee is never an easy decision. But when a lack of performance or lack of demand for a position is having a negative impact on your business, it may be the only choice. Businesses are also faced with the realities of employee resignations. Employees leave for a wide range of reasons, from upward mobility to family concerns. Let's take a closer look at the costs associated with employee turnover and what your company can do to help mitigate that impact to the bottom line.

Understanding the Context of Employee Turnover

Employee turnover refers to the rate at which employees join and leave a company in a given year. Some terminations are involuntary, such as layoffs and termination for poor performance. Others are voluntary, with employees choosing to leave an organization and often providing a period of notice.

Some reasons for employee turnover may include unmet expectations, clashes with management styles, a lack of work-life balance, or seeking better compensation and benefits. Regardless of the reason, it's important to acknowledge that turnover impacts your business. Employees have relationships and skills that can affect the bottom line. Certain positions can be difficult to fill. Hiring can be expensive. Any investments that you made in that employee are lost when they walk out the door.

The Direct Costs of Terminating an Employee

When an employee leaves, there are real, hard costs that can impact your business' bottom line. The first of these are the costs related to the employee actually leaving, such as terminating their benefits, complying with COBRA requirements if you have more than 20 employees (or state continuation requirements, if applicable), and paying out any separation benefits such as a severance or accrued time off. Subsequently, businesses are faced with the challenge of filling the vacancy. While you're hiring for the position, this can mean covering the costs of temporary employees or paying other staff overtime to complete that position's tasks.

Hiring a replacement can be an expensive process, including costs for placing job advertisements, using recruiters, or placement agency fees. There are also related staff costs for time spent interviewing, and in some cases paying for candidate expenses when conducting interviews. Finally, there are training costs associated with getting new employees up to speed, from conducting internal orientations to paying for external training courses.

The Indirect Costs of Terminating an Employee

While there are significant direct costs of employee turnover, it's also important to note that there can be many more indirect costs. Indirect costs are harder to quantify but may be equally or more devastating to the business. Turnover can cause employee morale to drop and have an impact on the overall company culture. There are productivity losses and potential impacts to quality and customer service. Employees leaving can damage relationships with clients, industry reputation, and overall positioning of your business. Depending on the employee, there may be a cost to future innovation and acquiring new clients as well.

What Businesses Can Do

It's in your business' best interest to do whatever you can to manage employee turnover. Focusing on improving your hiring process can be an important component of reducing turnover, along with clearly defining employee roles and standardizing management policies. Prioritizing employee communications is also helpful. Finally, offering benefits such as a 401(k), FSA, and performance bonuses can help to keep employees happy and engaged.

You don't have to solve this important challenge alone. Paychex HR Solutions clients have access to an experienced HR professional who can partner with your business for addressing critical HR areas. Learn more about how Paychex HR Solutions programs can help you develop better HR systems and tackle the important issue of employee turnover.

This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.
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