Retaining Employees Vs. Replacing Employees

Managing your business's workforce is an ongoing task that requires constant evaluation to identify productive employees and separate them from those who are more suitable for replacement. But the decision between retaining or replacing an unproductive employee isn't an easy one. Financial and legal issues can play into the decision and help shape your workforce, for better or worse.

Reasons

• There are several reasons that an employee can become the target of a replacement or retention discussion. Employees who show a low level of productivity or an inability to work in teams and follow instructions from management are natural candidates for replacement. Performance evaluations identify these employees and indicate how exactly they fail to meet company standards. Budgets can also dictate employee replacement, with low revenue forcing you to reduce the size of your workforce until you can afford to rehire or replace workers in the future.

Options

• Reducing part-time employees' hours is one way to cut costs while retaining workers. A hiring freeze or salary freeze will stabilize your payroll and allow you to retain your current employees. In the case of an employee with poor performance, termination and replacement is only the most extreme option. You may also choose to retrain employees with low performance ratings, or transfer them to positions with less responsibility. If you need better workers, investing in employee development may be a more cost-effective option than seeking workers with more skills who will demand a higher salary.

Considerations

• Cost considerations are an important part of the choice of how to manage employee replacement. According to the SASHA Corporation, worker replacement costs vary from one industry to another. These costs include compensation packages for employees you terminate and the cost of recruiting and training for the replacement. Worker replacement costs for those earning $8 per hour range from $3,000 to more than $20,000. The U.S. Department of Labor suggests you estimate that replacement will cost one-third of an employee's annual salary.

Effects

• Besides the cost to your business, replacing workers can have wide-ranging effects. A high turnover rate means you'll need a larger and more expensive human resources department to administer recruiting, interviews, training and paperwork for taxes, benefits and worker authorization. Large-scale worker replacement also affects the economy, creating newly unemployed consumers who may seek unemployment benefits or enter the labor market with fewer or different skills than the workers you hire as replacements.

Warning

• Replacing employees may open your company up to lawsuits from workers you terminate, regardless of your reasons. This is especially likely with workers who fall into a protected class based on race, ethnicity, religion or gender. Before replacing any employee, make sure you have a solid reason that you can back up with data, such as performance evaluations that show that you fired only your worst employees, or financial records that indicate a need to reduce the size of your workforce.