The true cost of replacing an employee in the distributed work era

Hiring & Onboarding

What influences the cost of replacing an employee? We break down the real costs of losing an employee.

Alexandra Cote
January 6, 2021

With remote work here to stay, professionals are more likely to quit their in-office job either looking for a fully-flexible schedule or thanks to the ease of the virtual recruitment process. 

The average replacement cost per recruit is $4,039 and can get as high as $150,000 for experienced professionals and complex roles.

But where do these employee separation costs come from?

  • Rehiring for the same position [including job ads, hiring professional payment, and skill assessments]
  • Training and onboarding a new hire
  • Covering for the severance pay and other benefit packages
  • Filling in the role temporary with a contractor or agency
  • Setting up new accounts, contracts, apps, and devices

The biggest budget drainers are hidden costs, especially those incurred when hiring abroad. 

On one hand, you could face decreased production, delayed project deadlines, and increased stress for other employees who might have to take over the duties of the person who’s just left. An increasingly remote workforce is also making companies susceptible to losing knowledgeable employees as jobs are now more accessible than ever before.

In turn, job hopping affects current team members who might show less engagement and proactivity at work.

Before we jump into a thorough breakdown of the costs you can optimize, let’s first understand what impacts them.

What influences the costs of replacing an employee?

To see if your own organization is prone to a higher cost of employee replacement, here’s a couple of factors to consider:

  • Role: Replacing senior-level roles tends to incur higher costs because the hiring process could be longer or you might have to hire two different professionals to cover the same role. On top of this, you’re also losing a teammate who knows everything about a project. Finding someone else to take over in this situation requires extra training and a temporary productivity loss.
  • Location: With remote work you can collaborate with anyone in the world. But this also means you’ll be facing extra competition when hiring top professionals as salaries for remote workers are now similar and even higher than for in-office employees.
  • Timing: Short on time? The faster you need to find a replacement, the higher the costs. Taking care of the same recruitment and talent assessment tasks in a shorter timespan will mean you’ll have to work with that expensive agency that’s the only one still available to take on more work.
  • Market situation: Prolonged recession has repeatedly been proven to influence turnover rates and costs. There’s also a highly-visible talent shortage in industries such as tech and manufacturing, prompting companies to go the extra mile with their recruitment efforts. On top of this, the rise of remote work is making many employees leave their jobs unless employers allow them to keep working from home.
  • Productivity levels and culture: Culture fit along with how employees feel and behave after a colleague leaves are two more factors to take into account when assessing the potential turnover rates for your own company.

Breaking down the real costs of losing an employee

You can apply the above factors to the following costs most employers bump into when looking to end a contract and find a replacement. We’ve also covered a couple of hands-on best practices to follow if you want to prevent increased costs.

Initial costs

Once an employee is gone, the whole recruitment process gets a refresh. That’s advertising, recruiting hours put in by HR contractors or agencies, background checks, and screening all over again. Talent assessment tools like HireSelect, Yobs, or Codility can help you speed up the process but keep in mind they come at a separate cost too. 

15% of your expenses will go towards this very first step of replacing an employee.

Now enter onboarding. 

Preparing materials, training a new hire, purchasing or shipping equipment, and taking time out of a manager’s usual workday all bring extra costs you can significantly reduce by preventing turnover from happening in the first place.

69% of professionals are more likely to stay with an organization for three years if they went through a great onboarding experience. This is one of the unavoidable costs of replacing an employee as improper onboarding would only further drain your budget and increase your turnover rate. 

Tip: To avoid ending up with no experts on a project, make sure you encourage knowledge sharing within the entire company and have multiple people shadowing employees in a senior or management role. This way, even when someone who was a core part of a project leaves, you’ll be left with a couple of team members who are familiar with everything and can pick up the workload.

When it comes to remote work though, there’s one huge cost you can cut out altogether: relocation. 

Within an office work format, companies can opt to cover the living and transportation costs of their new hires. The average cost of relocation? $19,309 — preventable by opting for a fully-distributed workforce. Make sure you’re not losing this money by backing it up through a contract, having employees who leave within the first one or two years gradually pay back this sum.

Initial employment taxes

The largest portion of the costs of replacing employees goes towards employment. Working with global talent often requires companies to set up foreign subsidiaries in every hire’s country. The costs add up to at least $80,000 per country. Staying locally compliant also incurs extra costs that will differ from one country to another depending on the benefits and allowances you need to offer.

To reduce costs to as little as $499/employee/month, use an Employer of Record like Panther to work with a global talent pool without the bureaucracy. Panther owns local entities so you don’t have to. We ensure low costs, flexible contracts, global compliance, and fast employment. We also provide criminal background checks, credit inquiries, and identity verification. This way, you’ll save millions of dollars whenever you’re working with talent abroad.

Recurrent costs of losing an employee

Bear in mind that losing employees demands some regular payments too. Once a team member leaves, your brand reputation could be impacted. Websites like Glassdoor and LinkedIn are making it easier for past employees to share their honest thoughts on their work experience with your organization. 

Solid employer brand reputation management efforts help maintain your image as a top employer. These include getting your current team to talk about life within your company, participating in industry events to showcase your culture and promote job openings, receiving top employer awards, etc. 

Besides attracting new talent, you’ll need to focus on retaining your remaining employees who might be dealing with “survivor guilt” or questioning their own position within the company. Culture-building activities, training programs, and support for maintaining the well-being of your hires lowers your turnover rates and boosts employee confidence.

Finally, take into account your monthly operating costs: legal fees, bank transfer and currency exchange costs, travel expenses, regular stipends, monthly bonus pays, and benefits. These recurrent expenses can be hard to reduce. For instance, remote work lets you cut out the travel costs altogether if you choose to never see your team in person.

However, regular get-togethers keep the team bonded and prevent employees from feeling like they don’t belong within that group.

To get a complete idea of how high the final costs of replacing an employee will be, go over calculating and improving the cost-per-hire for every new teammate. Also, check out our remote payroll compliance to ensure you’re covering everything when working with remote talent.

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