The True Cost of High Employee Fluctuation

cost of employer turnover burns a lot of money

Employee turnover is an expensive problem across industries. Last year, 1-in-5 workers voluntarily quit their job. Blue-collar sectors like manufacturing, logistics, and transportation have some of the highest average turnover rates. 29% of employees quit logistics and warehouse jobs last year. 56% of the manual workforce is at risk of leaving for another position. This cost of turnover is a substantial threat to company profit.

Analysts predict that employee fluctuation issues are going to get worse, not better, in the months and years ahead. Unemployment rates are at the lowest in 50 years in the U.S., and companies are struggling to fill open positions. Just around the corner, a wave of baby boomers will retire and leave the workforce.

The actual cost of employee fluctuation could shock you. U.S. employers spent $600 billion replacing employees who quit last year, according to the Work Institute. 75% of voluntary turnover is preventable. In other words, there’s potential for smart companies to save $450 billion each year on talent fluctuation.

Calculating the Cost of High Employee Turnover

The estimates of the cost of replacing an employee vary, depending on the employee’s role and the source. In one study, analysts estimated the total financial impact of replacing a $45,000 per year employee at $15,000 in total. According to other sources, the cost is equivalent to 6-9 months of an employee’s pay.

Employee fluctuation and voluntary quits carry both direct and indirect costs. Some are easily measured, and others are much less obvious. Let’s take a look into the different costs:

Recruitment

Posting jobs online and screen candidate resumes expensive. It is even pricier if you’re using a third-party recruiter to find candidates. These services charge up to 30% of an employee’s annual salary for each successful placement.

For illustration, let’s estimate the cost of posting one job for 30 days on two popular job sites. According to Glassdoor data, this could cost $800. If you hire a recruiter, you may pay $10,000-$15,000.

Interviews

For the sake of illustration, let’s assume your HR manager, who earns $80,000 each year, does the interviews. They perform six interviews to fill each vacancy, on average. In addition to that they spend 20 minutes preparing for interviews. You are absorbing $320 in direct interview costs, possibly even more with travel reimbursements.

Screening costs can vary depending on the amount of background checking performed. In general, a criminal background check can cost $20 per candidate. Pre-employment drug screening can range from $25-50. Assuming a candidate passes required screenings and it takes HR an hour to screen each candidate, that’s a direct cost of $95 to $120 for each hire.

Screening and New Hire Paperwork

Even if you are highly-efficient, your HR team unlikely to spend less than 90 minutes on new hire paperwork. Direct costs can include printing, lost wages, and time spent on new hire paperwork. Ninety minutes of an HR manager’s time is $60, using the wage example from above.

Training and Onboarding

The onboarding process in blue-collar companies takes, on average, 1-3 months. It takes employees time to get up to speed, even if you put people to work on day one. There are productivity costs for supervisors and employees who mentor new hires.

The average manual supervisor reports spending 30% of their time each year on repetitive training activities. Skilled workers may spend 20% of their time mentoring new hires. Assuming supervisors earn $60,000 and mentors earn $48,000, you’re losing nearly $30,000 per year on indirect costs.

Ineffective training isn’t the answer since it can lead to more costly turnover, mistakes, and accidents.

Tax restarts

If you call your salaried employees on to work extra hours, you may need to compensate them. This can trigger tax restarts, a direct cost via increased tax liability.

Labor diversion

Every hour you spent on recruiting, interviewing, and training your employees, you could use for other projects. In some cases, there can be high indirect costs when your talents are diverted away from strategically-valuable work to cover employee fluctuation.

Employees who are paid $30 per hour could have the potential to add $90-$120 of value per hour if they’re focused on strategic tasks. It’s hard to calculate the indirect cost of labor diversion, but it’s often enormous in companies with high fluctuation.

Loss of productivity

Productivity loss can be measured by a drop in productivity metrics every hour a job is unfilled. Studies show it can take an employee 1-2 years to reach full productivity potential in a position. Indirect costs associated with productivity loss can also include a drop in morale, a higher error rate, and even workplace safety issues that result from inexperienced staff.