What is the cost of replacing an employee?

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If you are a business owner or a manager, you probably have asked yourself the question what is the cost of replacing an employee on more than just one occasion?

Woman calculating what is the cost of replacing an employee

You may wonder why does employee turnover matter? Why should employers concern themselves with the what is the cost of replacing an employee? Both of these aspects can help business owners make better decisions.

Join us as we embark on a journey to unravel the intricacies of the employee replacement process. We will examine the direct and indirect expenses incurred during the hiring and training phases. Let’s also address the less quantifiable factors such as productivity loss, team morale, and company culture. By scrutinizing the true cost of employee replacement, we aim to equip employers and decision-makers with the insights necessary to make informed choices. Hopefully, this can help mitigate turnover and its associated consequences.

Whether you’re an HR professional seeking practical strategies. A business owner aiming to build a resilient team. Or an employee looking to understand your own value in the workplace. This blog post will provide valuable insights that apply across the board. So, let’s dive into the intricacies of the true cost of replacing an employee. Also, let’s unlock the key to cultivating a workforce that thrives on stability. Lastly, let’s help you increase employee engagement and loyalty.

What is employee replacement cost?

So whether an employee resigns or is let go, there is a cost associated with this process. Many individuals are surprised to learn just how high that replacement cost can get. This cost includes things like:

  • administrative costs
  • training costs
  • payouts or severance pay
  • costs associated with lower productivity

The employee replacement cost is essentially how much it costs a company to lose an experienced employee and replace them with someone else.

Person presenting their job resignation

Why is it important to understand the true cost of losing an employee?

Understanding the true cost of employee turnover matters because it can help business owners make better decisions. It will hopefully push employers to boost employee satisfaction. Moreover, they will work on improving employee morale as well.

If you are releasing an employee, you still have costs to pay

There are many direct and indirect costs associated with releasing an employee. One direct cost is severance pay. Severance pay is typically calculated based on factors such as the employee’s length of service and salary. In many industries, severance pay is not standard practice, so you may not have to worry about it.

However, a cost that is common for most business owners is paying for unused vacation days. You may need to compensate them for these days upon termination. Moreover, in some jurisdictions, terminated employees may be eligible for unemployment benefits. As an employer, you may be responsible for contributing to these benefits through payroll taxes, which could increase your overall labor costs.

Lastly, if the termination requires a notice period, you may need to pay the employee their regular salary and benefits during this time. This is even if they are not actively working.

Replacing that employee is time-consuming

Replacing any employee can be time-consuming. First off you need to spend time offboarding and terminating the employee who is leaving. Moreover, you need to spend time hiring, onboarding, and training the new employee. The typical in-house hiring process takes anywhere from 3 to 6 weeks.

How much does it cost to replace an employee?

The cost to replace an employee will fluctuate based on the industry. However, according to the U.S. Bureau of labor statistics, the cost of employee turnover is between 35 and 40 percent of an individual employee’s annual salary. These costs can be further broken down based on seniority, experience, etc.

Person working html on computer in a tech company

What is the average cost of losing an employee in the IT industry?

The average annual turnover rate among software developers in recent years has gone up. Generally, the turnover rate is about 57 percent. In this 29 percent is involuntary turnover, while 25 percent is voluntary turnover.

Specific cost figures can vary, some studies estimate that the cost of replacing an employee can range from 50% to 200% of their annual salary. However, it’s important to note that these figures are estimates and can vary based on the factors such as position, seniority level, location, and company size. Furthermore, it is generally recognized that the cost of employee turnover in the IT industry is quite high due to the specialized skills and knowledge required for these roles.

Why is the cost of losing an employee so expensive?

There are a lot of factors that make the cost of losing an employee so high. Let’s explore them in more detail below.

Recruitment & job offer costs

The 👉 recruitment process 👈 is an expensive one. You add to this process, the cost of employee turnover, and it grows exponentially higher. There are a few reasons why recruiting a new hire is so costly. First of all, you have to pay to post your job opening on a job board. Secondly, you have to pay your human resource management team to source, recruit and finally hire the person.

Additionally, if you are recruiting beyond an in-house process, it may further ring up that bill. Hiring software developers using a headhunter or an HR agency can be expensive. In the tech industry if you use an 👉 HR agency 👈 you may end up paying one month or two month’s worth of the developer salary. So if you are going to pay the developer 6000 dollars per month. The HR agency will charge you 6000 to 12000 dollars for that coder.

Smiling woman showing male colleague tablet screen in cafe outdoors. Talking about employee's salary

Salary fluctuations

When employees quit or you let go of an employee, it does not mean the salary of new employees will be lower. In fact, in most cases, employee turnover means higher salaries for new employees.

A salaried employee may leave a company to gain more competitive pay. Many employers promise that they will routinely carry out growth and salary talks, but unfortunately, they don’t happen. So you get coders who are constantly job hopping to find better pay. The job itself may not have been the problem. Perhaps they even liked their job and their coworkers. But no pay raise within a given time frame and people get frustrated.

Many studies show that the number one cause of employee turnover is no room for financial improvement. People will work for the same company for many years and never receive a raise. This is enough for them to look for a position elsewhere that allows for growth in salary on a regular basis.

The downtime for the role you just lost

When employees leave you need to take into account the downtime for that role. If you have projects that need that role, you may have downtime in those projects. You also need to take into consideration the time it takes to train someone to fit into that new position.

Also, a seasoned, experienced employee will offer you greater value than a new employee in terms of initiative. It takes time for new employee to gain their footing and the confidence to bend certain rules to make the project better.

Training fees for the replacement employee

When hiring new employees you should also consider onboarding costs and training costs. The onboarding process can be a long one and very expensive. Onboarding costs especially in the software development industry can be high because this process can be very long. The introduction to the company, employee culture, etc. may take only a few days. But catching someone up on a project can take a while. If they need to learn new skills, this process can also be lengthy and expensive.

Black woman pointing at document near lady with pen at table with calculator and gavel

Possible legal expenses

Another cost associated with employee turnover is possible legal expenses. Employee turnover can potentially lead to legal expenses for several reasons:

1. Wrongful Termination Claims:

If an employee feels they were terminated unlawfully, such as due to discrimination, retaliation, or violation of employment contracts, they may file a wrongful termination claim against the company. This can result in legal expenses, including attorney fees, court costs, and potential settlements or judgments if the claim is successful.

2. Discrimination or Harassment Claims:

High turnover rates may indicate underlying issues within the workplace, such as discrimination or harassment. If employees believe they have been subjected to discriminatory practices or a hostile work environment, they may file legal claims against the company. These claims can lead to investigations, legal proceedings, and associated expenses.

3. Non-Compliance with Employment Laws:

Frequent turnover may raise concerns about the company’s compliance with employment laws and regulations. If employees are not provided with proper wages, overtime pay, meal, and rest breaks, or other mandated benefits, they may file complaints or wage-related lawsuits. Legal expenses can arise from defending against these claims, paying fines or penalties, or settling with affected employees.

4. Breach of Contract Disputes:

Turnover can be linked to breaches of employment contracts, such as failing to fulfill agreed-upon terms and conditions of employment. If employees believe their contractual rights have been violated, they may pursue legal action against the company. This can result in legal fees and potential damages awarded to the employees if the court finds in their favor.

5. Intellectual Property and Trade Secret Protection:

In cases where departing employees are involved in proprietary or sensitive information, there may be concerns regarding the protection of intellectual property and trade secrets. If a company suspects an employee has taken or disclosed confidential information, it may initiate legal proceedings to safeguard its assets. These legal actions can be costly in terms of investigations, legal representation, and potential settlements or injunctions.

To mitigate the risk of legal expenses arising from employee turnover, companies should prioritize effective human resources practices, ensure compliance with employment laws, foster a positive work environment, provide proper training on company policies, and maintain clear and enforceable employment contracts.

Senior businesswoman boss promoting thanking female employee while team applauding to build up retention

How to avoid employee replacement costs? Build up retention.

You can reduce employee turnover using various employee retention strategies. Some popular retention strategies include providing 👉 employees with perks 👈 such as gym memberships, e-learning courses, remote work, etc.

Moreover, you should consider offering professional development courses, workshops, and conferences. Software developers look for the opportunity to grow, any moment of stagnation and they will hop to a different job opportunity.

Some other ways you can try to boost employee retention is by offering an open, friendly, feedback-driven work environment. You should create strong bonds with your staff and among team members. Also, provide recognition for software developers who are excelling at their job. Moreover, consider having regular growth and salary to provide adequate compensation. Also, as a way to reward progress and growth.

Reducing employee turnover with IT staff augmentation

Another way to fit with employee turnover and increase software developer retention is to use IT staff augmentation. IT staff augmentation can 👉 improve employee retention 👈because you can have that employee slot full for as long as you need.

Moreover, with IT staff augmentation you don’t have to worry about providing a lot of these perks. The staffing vendor will provide them for you. Here at Swyply, we handle all the perks for our developers. Also, we cover the growth and salary, so you don’t have to worry about providing competitive pay for the temporary developer.

Also, developers working on an IT staff augmentation have the opportunity for professional development as they don’t stick to one company forever. They will work on a project for the length of the staff augmentation agreement and then they get to move on. They can move on to another project, that will challenge them and continue to align with their career path.

When you partner with Swyply, you also have that added support when it comes to communication, feedback, etc. We can help in the rare event of communication breakdown. Moreover, we can pass along feedback if there is a need for it. Lastly, we can help mitigate any issues that may occur before they become bigger problems.

Man analyzing what is the cost of replacing an employee using laptop

TL;DR: Summary of what is the cost of replacing an employee?

The cost of employee turnover is high & in the IT industry, it’s even higher due to the high level of skills & expertise. An employee replacement cost is the price associated with letting an employee go. This cost contains costs like administrative costs, payouts, etc. Plus the cost of hiring, onboarding, and training a new employee.

It’s important to understand the true cost of losing an employee. The loss of an employee is more than just paying severance or unemployment. You also have to consider the time you have to put into replacing him or her. Moreover, you need to consider the time and cost it will take to train a new hire.

In the IT industry employee turnover rates are high. The U.S bureau of labor statistics has reported that there is a 57 percent turnover rate. The cost to replace a tech professional ranges from 50 to 200% of their annual salary. This gap is so large because the skills and experience needed in these roles can be vast.

Why does it cost so much to lose an employee?

So let’s tackle why the cost of losing an employee is so high. First of all the cost of recruitment is high. Posting on a job board and paying your HR can really add up. If you are turning to an external HR agency, these costs can be even more expensive. Moreover, you need to account for the fact that the salary of your new hire, may be higher than that of the one you let go. Some other expenses you need to consider include:

  • Downtime for the role you lost
  • Training fees for the replacement employee
  • Possible legal expenses associated with letting an employee go

One way to avoid employee replacement costs is to build up retention. There are many proven retention strategies. Some of them include:

  • Employee perks
  • Offering professional development courses
  • Creating strong bonds and a positive atmosphere
  • Providing recognition for excelling employees

You can also try to use 👉 IT staff augmentation 👈 to help build retention. This is because IT staff augmentation’s main purpose is to fill that employee slot for as long as you need. If necessary we will replace the developer, so that you constantly have the skills you need on your team.

Want to learn more about the cost of employee turnover? Did we miss anything that you think is worth covering? Or perhaps you want to learn how to use IT staff augmentation in retaining employees and minimizing your overall company costs? 👉 Drop us a line 👈, and let’s chat. Let’s have a free no-obligation chat about how IT staff augmentation can help you minimize the cost of employee replacement.

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