To top it off, remote work already has enough concerns, especially financial ones, the employers are worried about. So, the cost of firing an employee can flatten the business owner’s wallet.
Whatever the reason for firing or quitting is, there’s always a considerable cost involved, and it’s usually higher than the employers imagine. Therefore, before firing an employee, it’s critical to assess whether there are ways to improve one’s performance because it’s much easier than just giving up on a person.
HR Bit is here to explain the actual cost of firing an employee to help you understand what this process really entails and how it might affect your company’s financial stability.
Firing an Employee: What Does Statistics Say?
Turnover is no cakewalk both for the employee and the company. Once having a vacated position, the business experiences lower productivity and understands that new hire costs include interviewing time, training, and paying recruiters to fill in the spot.
- more than 3 in 4 employees who quit/got fired could have been retained by employers
- the average cost to lose a US worker is around $15,000
- 76,8% of all turnover costs are controllable, so $469 billion could have been saved if employers aligned with retention requirements
- replacing mid/high-level executives costs up to 150% of their annual salary and around 30% to 50% for entry-level specialists
- in case of wrongful termination, an employee lawsuit can cost organizations $250,000
The most common (and fair) reasons for dismissal include:
- Conduct or misconduct
- Capability or performance
- Statutory illegality or breach of a statutory restriction
- Some other substantial reasons (like a breakdown of trust or confidence between employers and the employee)
There’s an abundance of direct and indirect costs associated with termination, and most of them are connected to filling a new position. On average, it takes 42 days and $4,129 per hire.
Apart from that, some positions are harder to fill in than others. Mainly, the hiring process comes down to the following activities:
- create a vacancy description and advertise the opening
- the time cost of an internal recruiter
- the time cost of contacting the potential candidate, reviewing all the CVs, conducting the interviews, test tasks, and background checks
Although not each position requires that many processes, even if the recruiters are paid an $8/hour, this can end up costing a company approximately $3,500 in turnover costs.
Also, the employees usually build certain relationships with each other and understand what to expect from this or that colleague. And once the new person joins the team, they require time to find a common language and get back to the former level of productivity.
Nevertheless, termination isn’t always as bad as it seems. People are different, and so are employees. Some of them might harm the whole working environment, being toxic and causing distress. Meanwhile, others might require several more resources that don’t match the impact and income they bring the company.
The cases are various, so before telling someone off, make sure there’s nothing you can do to prevent it or that there’s a substantial reason.
True Cost of an Employee Termination: Direct Expenses
When it comes to firing employees, employers usually have to pay out separation benefits, such as severance or accrued time off. Once there’s a need to fill the vacancy, the businesses often have to cover the costs of bringing on contingent specialists or increasing the salaries of other team members due to higher load and overtime.
Apart from the costs mentioned above, like paying for the recruiters’ services and time spent on interviewing, there are additional ones, namely training costs.
Once you have new remote employees, you need to make sure their onboarding goes well by providing internal orientations and paying for the courses to make it easier for them to tap into the established pace of work.
What about severance pay and accrued time off?
The decision to offer severance pay to remote employees depends on the company because it’s not mandatory. Nevertheless, if you include it into your employee handbook, policies, or the employee’s contact, you’re legally required to give it.
It’s the money your team members receive when they are fired from the company (or if they quit). Most often, the businesses offer one to two weeks of severance pay depending on the period the person has worked at the organization. The sum of severance pay also depends on the employee’s salary and how many weeks or days your company offers for each year an employee has been in your business.
In other words, suppose the person worked at the company for three years, and the organization’s policies mention that each year implies two weeks of severance pay. Let’s say the specialist’s salary was $800 per week. In this case, the company would have to pay the fired employee $4,800 in severance pay ($800 X 6).
As for the accrued time off, it’s the money you compensate the employee for unused hours of the paid time off.
If you have 20+ full-time remote employees, you’re required to offer COBRA. This is a health insurance coverage you give your former team members after they are terminated. COBRA (The Consolidated Omnibus Budget Reconciliation Act) coverage is applicable to private-sector group health plans and those provided by state and local governments.
You’ll probably pay part of the coverage when firing an employee, and the employee pays the other part. Usually, laid-off people are covered under COBRA for 18-36 months, receiving the same coverage as if they still worked at the company.
Let’s put it this way: when one remote employee, Jeremy, gets fired, the other one, Linda, has to pick some of the slack to cover for Jeremy’s duties.
Usually, Linda works 40 hours per week, but she has to work overtime since having new responsibilities, sitting at her home office for 45 hours instead. If Linda’s hourly rate is $17, her employer would need to pay her five hours of overtime wages.
As a result, her gross pay would be increased by an additional $85.
Besides, since the average cost-per-hire is $4,129 (as mentioned above), it can be even higher. According to other studies, every time a company replaces an employee, it pays 6 to 9 months’ salary. So, for example, if a specialist is paid $40,000 per year, it will cost $8,000 for the business to replace one.
What is the Indirect Cost of Firing an Employee?
There’s a handful of hidden costs that can negatively affect your business. Although they’re harder to quantify, they are as devastating to the business as the direct ones. The most common examples are lost productivity, decreased workplace morale, and damaged relationships with clients, as well as the organization’s position on the market.
If you own a startup or SMB, these costs hit harder and usually include:
As long as you have a vacant position, the existing employees have to cover it, apart from their own duties. This makes them too scattered, resulting in reduced performance and fewer tasks accomplished.
Overworked and burned-out team
Having to deal with a handful of additional duties might seem fine early on. However, the longer employees have to deal with the unexpected load, the more they’re likely to feel burned out. This, in its turn, leads to hurt morale and increased turnover.
As soon as you finally hire a new member, they need a mentor to help them understand how the work is done. Also, they’ll require outside workshops to hone their skills. This leads to losses in time and productivity because some team members have to help the newbie out and get their job done.
How to Avoid Firing an Employee?
Employee retention is what can help you plug a thousand-dollar leak in your startup or SMB. If you engage employees to have conversations, ask about their wellbeing at the job, and give feedback, they’d feel appreciated and more satisfied with their jobs.
It’s crucial to keep the team inspired and interested in their work. Clear communication, performance evaluation, a friendly working environment, and perks can go a long way. It’s necessary to create an environment that boosts productivity and encourages employees to make full use of their potential.
Recently, we came up with an article on employee retention, and here are some spoilers from it:
- hiring a remote HR is like having a spell wand that boosts your business
- encouraging risk-taking helps teams come up with innovative ideas
- marking the milestones and rewarding efforts is just as important as shining light on results
- remote workers often face the absence of the work-life balance, and mental health days off can become game-changers
So, you’re welcome to check it out and gain some insights.
The cost of firing an employee is daunting, so farewell letters can wait for a while in your email drafts. Employee retention is a silver bullet for the increased turnover.
We understand that startups and SMB owners don’t have much time, and if they start taking care of employee retention, their businesses won’t be likely to have a first-to-the-market advantage.
To avoid struggling with telling someone off, consider hiring a remote HR. This is an experienced person that understands all the pains of remote employees and tackles any issues.
HR Bit boasts skilled HR specialists, so don’t hesitate to contact us to get going.