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The True Cost of Firing an Employee

The True Cost of Firing an Employee

By Jeanette Coleman, SPHR & SHRM-SCP on Mar 22, 2023
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Terminating an employee, already one of the more complex and unpleasant requirements of running a business, also can be costly in both obvious and not-so-obvious ways. From legal implications to the possible impact on morale, this post breaks down the costs associated with terminating an employee and provides practical advice on minimizing these costs while still ensuring compliance with the law. 

Legal Costs 

People may believe that being fired for an unfair reason equates to wrongful termination, but that’s not entirely correct. Kansas and Missouri both are “at-will” employment states, which means employers in those states (and many others) can terminate a worker without warning for any reason unless that reason is discriminatory or retaliatory. 

Multiple state and federal laws protect employees from wrongful termination, and failing to comply with these laws can result in costly lawsuits and damage to your company’s reputation. Understanding and following these laws – in other words, making sure the reason you’re letting a worker go isn’t discriminatory, retaliatory or otherwise illegal – reduces or eliminates the risk that a terminated employee will file a claim against your company.  

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Severance Pay  

According to the Department of Labor, it’s not mandatory to pay severance to a terminated employee, unless your policies or an employee’s contract state that you will do so. Nevertheless, companies sometimes choose to offer severance pay for a week or two, or perhaps longer if the person is tenured at the organization, as a gesture to ease the employee’s transition. Providing severance pay also may reduce the potential of a former employee filing suit against you. 

Unemployment Insurance Costs 

An employee who is fired generally can collect unemployment unless the individual was terminated for misconduct, which is generally defined as intentional behavior that harms the employer organization. Your company won’t immediately incur new costs if a former employee successfully files an unemployment benefits claim against you. Rather, the terminated worker is paid from a state pool of benefits that is funded by the state collecting, over time, a small percentage of each payroll distribution made by every business in the state. However, unemployment claims can cause the percentage your company pays into the state’s coffers to go up. 

RELATED: What Is At-Will Employment? >>

Cost to Replace the Employee 

Finally, your company will incur costs to replace the employee. These costs can include advertising the position, working with a recruiter to fill a high-level role and taking time to conduct interviews and train the new employee. The new hire also may require a higher salary than your previous employee did. 

These costs can add up quickly, especially if your company is in a highly competitive industry or is located in an area with a high cost of living. The Society for Human Resource Management estimates the cost to replace an employee is six to nine months of the employee’s salary, on average.

In other words, replacing a salaried employee paid $50,000 per year would cost your company $25,000-$33,000 in recruiting and training costs. Other research places the cost even higher.

To minimize these costs, lean on a well-defined recruitment process and invest in employee retention programs to reduce the need for frequent replacements. 

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Soft Costs When Terminating an Employee

There are “soft costs” associated with firing an employee, too. These include: 

Loss of Productivity 

After an employee is terminated, productivity may lag while the company searches for a replacement. This can be particularly impactful if the terminated employee was a key member of a team or held a critical position in the company. To minimize the loss of productivity, put a plan in place for covering the terminated employee’s responsibilities until a replacement can be found. This may involve cross-training other employees or hiring temporary workers. 

Impact on Morale 

Terminating an employee can take a toll on morale, creating a ripple effect through the company that may make remaining employees feel insecure, angry or – for those who pick up work previously handled by the terminated employee – overworked and burned out. To minimize the impact on morale, handle terminations professionally and with empathy for the employees who remain. 

RELATED: Best Practices When Terminating a Remote Employee >>

Plan Ahead 

While there are rare instances when an employee should be fired on the spot – if a worker is threatening violence, for example – company leaders generally have time to take appropriate steps that will protect against legal action and determine how the to-be-terminated employee’s work can be dispersed to others without overloading them. 

If you’ve begun to believe that a worker should be let go, and you’ve double-checked that the reason you’re considering termination is not discriminatory or otherwise legally prohibited, take a cautious, “progressive discipline” approach. Counsel the individual about where performance is not up to par and, if the problem persists, follow up with written warnings. Maintain proof of your efforts to make the shortcomings and desired corrections clear, and bring this documentation with you to the termination meeting

Letting an employee go can be costly, but by understanding the costs associated with terminating an employee and taking steps to minimize them, you can ensure that you are making informed decisions and protecting your company’s bottom line. 

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