The Cost of Replacing an Employee In Business

When measured in monetary terms, the direct costs of replacing an employee can range from 50% to 200% of their annual salary (one-half to twice their annual salary). But the price goes well-beyond dollars and cents. After people leave, companies can lose more than $50,000 a month in productivity for every 100 employees remaining. Equally devastating are the effects on employee morale, customer relationships, and brand equity in the marketplace.

In a labor market that’s arguably tighter than it’s ever been, engaging and retaining good people is something responsible businesses need to put front and center.

In this article, we’ll examine the hard and soft costs associated with replacing an employee and explore some of the employee retention tactics you can adopt to avoid spending money unnecessarily in this manner.

High Employee Turnover Costs Money

People decide to move on from their current employers for various reasons. Some retire or move to another part of the country. Others give up work for personal reasons, such as furthering their studies or caring for children or elderly parents. Sometimes employees decide to accept a job with better pay or perks from another organization.

The cost of replacing an employee has surged in the post-pandemic landscape, making it crucial for businesses to retain talent and address employee priorities effectively.

In the post-pandemic landscape since 2020, many employees are now reassessing their personal priorities and fundamentally rethinking their futures. Staying in a job where they feel unappreciated, underpaid, or simply not “making a real difference” is simply no longer a viable, long-term option.

But, as we touched on earlier, this mindset and course of action come at a steep cost to businesses across all industries.

Direct vs. Indirect Costs of Employee Replacement

Gallup estimates that the replacement of leaders and managers costs around 200% of their salary, the replacement of professionals in technical roles is 80% of their salary, and frontline workers 40% of their salary.

So, why does it cost so much to replace a departing employee? Well, the spend falls into two key areas, known as direct and indirect costs.

Indirect Costs: The Impact of Employee Turnover on Company Culture

A Decline in Productivity

All too often, once an employee has handed in their letter of resignation, they “take their foot off the gas” – assuming they’re required to work out a notice period in terms of their contract of employment and don’t leave immediately. This effectively means that you end up paying them for doing very little.

Rather than expect soon-to-be-departing employees to continue to perform their regular roles, it’s a better idea to ask them to focus on putting together handover briefs or training up coworkers who will need to step in to fill the gap once they leave.

Low Morale

When people see and hear about their colleagues leaving, it can cause feelings of sadness and dent overall employee morale. This is especially true if the person leaving is popular and respected. Also, remember that the workplace isn’t just somewhere where work happens; it’s also a place where friendships are forged.

According to a study by Office Vibe, some 70% of employees say that having a friend at work is the most crucial element to a happy work life. In addition, 50% of employees with a best friend at work report feeling a stronger connection to their organization.

Another way that losing employees impacts the overall morale in the business is that your remaining employees will likely need to pick up the slack, possibly causing them to feel overwhelmed or even resentful.

Direct Costs: Factors Contributing to Employee Turnover Costs

Unemployment Benefits and PTO Payouts

If the person leaving your organization files an unemployment claim, you may have to make a payment to them. There’s a chance that this could result in your company’s unemployment tax rates increasing.

You’ll also have to pay your departing employee what they’re due for any PTO for the year.

Legal Fees

In the unfortunate event that the employer-employee separation results from a falling out or dispute, the need to engage legal counsel may arise, the costs of which can be significant.

Recruitment Costs

The price of finding the right person to hire can quickly add up. These costs can include the man-hours that your internal recruiter puts into the candidate search (writing job descriptions, screening resumes, scheduling and attending interviews, and doing background and reference checks, to name a few).

Other costs include job advertisement placements and agency fees.

Vacancy Costs

When you lose an employee, you need to decide how you’re going to fill the gap they leave in their wake until you find a replacement. One option is to ask other employees to step in, which may result in you paying a lot in overtime.

Another avenue is to hire a temporary staff member – but again, there are costs associated with this, including their wages and training costs.

Onboarding and Integration

Once you’ve found and hired the right person to replace the employee that’s left the organization, there are costs associated with onboarding and integrating your new hire into the business. Effective employee onboarding should never be overlooked, and it requires time and effort on the part of multiple stakeholders within your organization.

Other hard costs resulting from hiring new team members include things like buying them uniforms, computers, and cell phones and kitting out their workstations.

Training

New hires generally take longer to perform their tasks and are less productive than their peers during their first few months. To get them up to speed as quickly as possible, investing in the necessary training is a good idea.

Bear in mind that this also costs money – as well as time – as while the new employee is attending their scheduled training sessions, they won’t be doing any regular work.

Persistent Talent Shortages Make High Employee Turnover Cost Even More

Talent shortages persist, which means finding suitable candidates to replace departing employees will take longer and cost you more. Recent research revealed that:

• More than half of organizations increased their recruitment efforts in 2024.
• One in four organizations say they receive too few applicants for open roles.
• 63.1% of companies expect a talent shortage or lack of qualified candidates to impact their ability to hire in the next year.

Which Industries are Most Affected by High Employee Turnover?

Employers that offer jobs that are fully in-person and traditionally have lower wages have a more difficult time retaining workers. This was the case even before the pandemic. For example, the leisure and hospitality industry has experienced the highest quit rates of all industries, with the accommodation and food services sub-sector of this industry experiencing a quit rate that’s hovered around or above 4% since July 2022.

The truth is that certain industries and occupations simply cannot function without in-person work. The highest propensity for in-person work exists in the hospitality and food services, transportation, and retail trade industries, where nearly 80% of employees work fully on-site.

Calculating Employee Turnover Rates

Understanding your turnover rate is just the first step—it’s equally important to consider the cost of replacing an employee. This cost includes not only recruitment expenses and training but also lost productivity and the impact on team morale. By factoring in these costs, businesses can see how high turnover rates significantly affect their bottom line and take proactive steps to improve retention.

Every employee that leaves will have earned a different compensation package and, thus, their separation costs will be unique. What’s more, your turnover rate will vary depending on the industry in which you operate. Other factors that might influence your employee turnover rate include the demographics of your typical worker. If your business is seasonal or if you employ primarily entry-level or younger staff, you can expect your turnover rate to be on the higher end of the scale.

However, regardless of your circumstances, doing a simple calculation using averages will give you an accurate estimate of the level of employee turnover in your organization.

You can work out your yearly turnover rate by taking the number of separations during any given year and dividing it by your average number of employees during that same year.

Here’s a simple example:

100 [(10 employee separations) / (50 average employees)] = 20% turnover rate

Techniques for Reducing Employee Turnover and Increasing Employee Retention

Now that we’ve explored the many costs associated with losing and replacing employees, it’s clear that building a solid retention strategy makes good business sense.

Here are some practical tactics to boost your employee retention and reduce your employee turnover rates:

Pay Attention to Job descriptions

Don’t just rehash and republish the same job descriptions that you’ve been using for years. Why not start the new year by critically reviewing your job postings? Consider asking a handful of your existing employees to look at them with a fresh eye and offer constructive feedback on how they could be improved.

And remember, while it’s important that you clearly outline roles and responsibilities, don’t let your job advertisement become little more than a list of duties. Try to inject some personality into it; do your best to present your organization as a fun and appealing place to work.

Hire the Right People

Screen applicants formally and informally right from the start. Begin by carefully examining their resume. Do they have the right qualifications and experience? Are there any signs of excessive job-hopping? Get a few of the would-be candidate’s future colleagues to sit in on a few of your interviews – even if they just perform the role of observers. Also, don’t neglect to check the applicant’s references. Make sure you don’t just speak to someone from their previous employer’s human resources department. Wherever possible, ask to speak with the applicant’s line manager/supervisor, peers, and direct reports.

Also, consider diversity as part of your hiring strategy. Actively seek out people from different backgrounds and walks of life. Look to hire a blend of outgoing extroverts and thoughtful introverts. When teams comprise individuals with diverse professional backgrounds and prior work roles and experiences, they generally come up with stronger plans.

Build a Positive Workplace Culture

Studies have identified a direct link between the strength of a company’s culture and its longer-term success in its marketplace. So, what do we mean by “culture?” A company’s culture is understood as the beliefs, values, and norms that collectively guide how an organization and its employees think and act.

When people work at companies where they feel the culture is aligned with their personal attitudes and values, they’re generally happier. And happy people are far less likely to leave their job than unhappy ones.

Offer Attractive Compensation and Benefits

In a tight job market and with talent scarcer than ever, it’s no time to skimp on fair compensation. Ideally, this should go beyond simply paying good salaries or wages; it should extend to other perks such as medical insurance, retirement funding contributions, paid time off, educational support, and more. Also, consider offering Employee Assistance Programs (EAPs), which are interventions aimed to support and rehabilitate employees who are suffering physical, emotional, or mental health problems.

Implementing such initiatives will show both existing and prospective employees that yours is a caring organization that takes care of its people and sees them as human beings, not just “a number.”

Engage Your People

Did you know that 80% of the global workforce, or 2.7 billion employees, are deskless and often outside office space? These folks include warehouse workers, waiters, retail associates, drivers, landscapers, dishwashers, and thousands of other occupations. Deskless workers typically lack access to email and have little contact with executives and managerial staff. As a result, many are left feeling disconnected.

If your company comprises a large percentage of hourly-paid or deskless workers, you’d do well to consider investing in mobile technology and reward systems that help them stay connected and feel appreciated.

Be Flexible

Corporate America is fundamentally rethinking the concept of flexibility as part of its efforts to hire and retain good people. Consider some of these recent developments recently reported in The Washington Post:

• Bolt, a San Francisco-based e-commerce start-up, boldly introduced a permanent four-day workweek for its nearly 600 employees.
• Slack’s workplace communications platform is reimagining its office primarily as a gathering place for meetings and projects.
• Tech giants such as Amazon and Salesforce are allowing their employees to decide as a team when and where they should work, based on the projects at hand.

That’s encouraging news. But what about hourly workers and those that work in the retail and service industries where remote working isn’t feasible? There are other ways to offer these employees a degree of flexibility.

For hourly workers, giving employees the option to swap shifts can be useful. This is particularly helpful when an employee has a last-minute childcare issue to attend to, for example. As an employer, you can eliminate the administration work involved in this process by investing in an application that gives your people direct access to your shift scheduling system. They can quickly swap shifts or even pick up extra shifts with just a few taps on their smartphone.

Consider Earned Wage Access

Another option to consider to build employee satisfaction and retention among hourly workers is Earned Wage Access (EWA). EWA services allow employees to access pay they’ve accrued but not yet received. They can help solve the problem of sudden, unplanned demands for cash, such as the need to pay an unexpected medical bill or repair a vehicle. Employees value the financial wellbeing that this flexible pay model provides, as it offers a means to avoid going into unnecessary debt. Payday loans, auto-title loans, and bank overdrafts are all high-cost instruments that may push them toward financial ruin.

Payactiv offers a compelling model for EWA to help both employers and employees. The service is low-cost to employees and zero-cost to employers. Our unique operating model means that our service doesn’t involve lending money to employees – we simply provide access to their cash early. There are no credit checks and no adverse impact on credit histories. We offer a SaaS-based service that employees can access anywhere with a smartphone. Our service integrates fully with the systems provided by the significant payroll providers so that it aligns fully with your payment process from day one.

How EWA Can Reduce Staff Turnover and Increase Employee Retention – a Success Story

The employees of JAE, a popular restaurant group, get paid biweekly. But because they offer Earned Wage Access through Payactiv, their employees can now access their money whenever they need it. Since implementing Payactiv, JAE has seen a significant increase in employee retention and estimates that about 50% of the users are staying longer. The number of active users continues to grow, but so far, the most popular feature has been Instant Deposit, allowing their employees’ instant access to their wages.

Read more about JAE’s story here.

It’s Time to Address the Factors Contributing to Employee Turnover

When employees leave your company, it can deliver a blow to your budget, not to mention your levels of employee engagement and general workplace morale.

So, start 2025 off strong by implementing solid retention strategies for your businesses to mitigate the soft and hard costs of employee turnover.

Learn more about Payactiv’s Service, or book your demo now.