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Hello,

Welcome to today’s episode, devoted to the costs of terminating an employment contract. As it is commonly assumed, the employee dismissal costs are equal to the costs of recruiting a replacement. In this podcast, I am going to explain why this approach is so very incorrect. A closer look at the key aspects of the firing-to-hiring process may actually prove it is a trouble in disguise. We might be losing a lot more than we initially thought.

Let us begin with the recruitment costs

– placing a job advert and, sometimes, paying the fees of a recruiting agency and an HR specialist. The total may range from a few hundred to over tens of thousands Złotys. But that is just the tip of the iceberg. 

We also have to deal with the prolonged underperformance of the leaving and the newly recruited workers.

For permanent contracts, the most common notice period nowadays is one month. It may vary from two weeks to three months (though very rarely), with a tendency to shrink, especially in tech companies. This trend seems to reflect a general decline of the long-term employment ethos among young workforce.

So, for one and a half a month on average, hardly anyone works to their fullest, not only because they don’t care. We can optimistically count on a 50% effectiveness of leaving workers, for various reasons. 

We should even expect less work from them as they are supposed to gradually transfer their duties to their replacements. Paradoxically, their high efficiency just before they leave may indicate that their replacements are just not ready to take over. When this finally happens, they don’t reach their predecessor’s benchmarks overnight. This results in more costs.

Thirdly, costs are created when, too often, leaving employees take long sick leaves or just walk out on their jobs.

Even when they rightfully use up their overdue holiday time or claim its financial equivalent, this almost never happens at the right time for their company. I must mention here that there are positive exceptions, too. While I managed a hotel in the UK, I had a receptionist named Rowan, from South Africa. On his last day, he happened to make a mistake, 15 minutes before leaving. He loyally stayed over to learn what was wrong and then corrected the situation. Well, a nice memory to cherish, once in a blue moon.

Another problem is a smooth transition between dismissing the old and hiring new staff.  

Newly recruited candidates must first finish their commitments elsewhere, which may take one to two months. Employers often face a choice – either wait or take on someone worse qualified, available straight away. Once again, the vacancy costs may outgrow the expected benefits.

The fifth concern are the disturbed team processes.

Each departure has an impact on the group, positive or negative. Each new arrival brings about a reset of interpersonal bonds and a reconstruction of the team’s communication and work interactions. It is not only about the single people’s efficiency during their departure and induction period or the downtime in between. Apart from suffering potential losses in harmony or team spirit, the whole team is involved in covering for the leavers and inducting the newcomers.

The sixth risk area is related to the intellectual property.

Dismissals may interrupt sales processes. There may be unethical takeovers of the customer databases or customer accounts by the leaving employees. A threat equal to the ex-employees’ revenge is to recruit the ex-employee’s replacement – a stranger – and give him access to the company’s sensitive information. This reveals a far more serious aspect of the firing-to-hiring process.

The seventh point is, and I can tell you that, every contract termination is a tough moment for the line managers.

They often treat the departure of their team member as their personal defeat. They blame themselves for the wrong recruitment, wrong training, wrong loyalty incentives and failing to help the employee feel accepted and willing to stay. This is certainly a painful, but precious lesson of what to do better in the future, but there’s more to it than that. It hurts emotionally when it is happening and affects the spirit, the actions and the efficiency of the team. Though harder to evaluate and calculate financially, this is something to bear in mind as well.

Another point worth mentioning is the funds spent on staff trainings, quite often underrated by the employers or treated as risky investment.

They might be right about the risk when they lose a well-trained employee. But there is one thing even worse than that– the undertrained employee that stays.

When I tell you about all these costs and risks, I’m not trying discourage you from extending your teams or developing your businesses. I just want you to be aware how much time, energy, team spirit and sheer cash is at risk when an employee leaves. All that shows how important it is to select the right people at the stage of recruitment. Oftentimes it is not strictly the unsatisfactory salary, but how much money is allocated into personal development and well-being that is raised as the most common reason for attrition. The managers and their subordinates expect their self-actualization needs to be recognized and addressed as equally important to their pay.

So, I encourage you to take care of your staff as whole people, not just as work providers or salary recipients. Support diversity in your teams, transparency of their communication, self-growth of the executive personnel and keep your company objectives clearly defined. Talk one-on-one, build your teams just as carefully as you expand your businesses. Make sure you recruit the right people. Remember that the HR agency fee, high as it seems, isn’t nearly as much as the widespread costs of a potentially wrong recruitment decision. By seeking the support of a recruitment agency, we do not only reduce the risk and scale of potential losses – we also take care of our teams as the basic source of the company’s growth. Remember, the cost of a leaving employee is way higher than the cost of recruitment.

All that I have said about the costs of terminating a job contract was by no means meant to stop you from giving your employees honest feedback on their performance.

You can hear more about it in Episode 5, which covers the Managing People Out process. The staff members that don’t make the expected contribution to the value of the team and the company, should hear it clearly. The longer they stay in the team the more harm they cause. 

This is another demanding task of a manager who, mindful of the high replacement costs, must appraise individual contributions to the team and weigh benefits against risks. And to stay fair the whole time, even though it’s hard for them or you.

Best of luck and thank you.