Financial Problems of Firing an Employee

You need to understand the financial implications of firing an employee before making your move.

Firing an employee is a task that managers do not look forward to. But it is sometimes necessary when an employee is continually insubordinate or engages in activity that is detrimental to the company. There are financial implications to consider when firing an employee that should alter your approach to letting employees go.

Productivity

Firing an employee is significantly different than laying an employee off. When you do layoffs, they are planned in advance and the loss of productivity is factored in to the decision. A firing is not planned so far in advance that you can see the financial effects of the drop in productivity that the decision will cause. You may feel that you can do without the employee based on her performance, but the other employees that relied on her to be there will all be affected.

Recruitment

Firing an employee causes a severe disruption in the staff and how the staff operates. A human resources department may have a list of potential replacements, but it takes time to interview those candidates and put them through the screening process. Replacing a fired employee is not part of a departmental or human resources budget. The funds necessary to quickly interview and hire a replacement are unplanned additional costs that will affect the company's bottom line.

Morale

Firing an employee may eliminate a set of problems that was affecting management, but the impact of the move will be felt throughout the rest of the staff. If the fired employee was popular and the move was seen as unjust, then it could trigger a wave of turnover. The costs associated with replacing employees who quit due to the actions of a manager who fired an employee can become staggering if the turnover is significant.

Lawsuits

Wrongful termination can result in costly lawsuits. Examples of wrongful termination include firing an employee due to race, releasing an employee who was protected under state "whistle-blowing laws" for exposing negligence by management that could harm the public or letting an employee over the age of 40 go just to make room for a less-expensive and younger employee. Work with a labor attorney to make sure that you are firing an employee for reasons within the bounds of the law to avoid costly lawsuits.

References

• Nolo: When a Firing May Be Illegal
• University of Wisonsin Center for Community & Economic Development; How Much Does Your Employee Turnover Cost?; William H. Pinkovitz, et al.
• "Boston Business Journal"; How Much Does an Employee Cost?; Joe Hadzima

Resources

• U.S. Small Business Administration: Terminating Employees