There’s More to the Cost of Firing an Employee Than Meets the Eye

Losing employees can be devastating for your small business. Employee turnover can drain workplace morale and cost you time and money finding replacements. What’s even worse is having to fire an employee. Read on to find out the cost of firing an employee.

Firing an employee

Sometimes, you might have to fire someone. Though no employer likes to do it, there are many reasons for firing a worker:

  • The employee’s performance is subpar
  • The employee slacks off
  • The position needs to be cut
  • The business cannot afford the employee

Firing an employee isn’t just hard on the terminated individual and employers. It can also lead to a drop in morale among your other employees. They might be worried that they will be the next to go.

If firing is necessary, make sure you learn how to fire an employee legally and tactfully. Conduct multiple performance reviews where you tell the employee what they need to fix, listen to any concerns or problems the employee has with the job, and budget business expenses. Don’t fire an employee in front of all their peers.

The cost of firing an employee

The firing process can take time and cost money. The cost of an employee getting fired can include:

  • Accrued paid time off
  • Severance pay
  • Continuation coverage
  • Vacancy
  • New hire
  • Miscellaneous

If you must fire an employee, make sure you have a plan. There is no standard cost of firing an employee. Depending on your business’s policies, needs, and industry, you might have a higher or lower average cost.

Accrued paid time off

When you fire an employee, you must give them their final paycheck. If you offer paid time off (i.e., vacation or sick pay), you will also need to compensate the employee for unused hours.

For example, let’s say you give each employee 12 days (96 hours) of paid time off at the beginning of the year. You fire an employee in April. The employee still has 10 days (80 hours) of paid time off remaining. They earn $15 per hour. You will add $1,200 (80 X $15) to the employee’s gross pay.

Severance pay

You might choose to offer severance pay to your employees. Severance pay is the money your employees receive when they are fired from your business (or in some cases when they quit).

Businesses are not obligated to give severance pay. But, you are legally required to if you include it in your employee handbook, policies, or the employee’s contract.

Severance pay will vary based on three factors:

  • How much your employee earned
  • How long the employee was with your business
  • Your business’s policy

If you provide severance pay, you will continue paying your employee their wages for a time period.

Most businesses offer one to two weeks of severance pay for each year the employee has worked at your business. But, this can be more or less. Some companies choose to give four weeks per year of service. And, higher-level employees can earn upwards of one year of severance pay.

Many employees will try to negotiate severance pay. Determine what the best course of action for your business is if this happens.

Let’s say you must fire an employee who has been with your business for three years. Their weekly pay is $750. Your company policy states that each employee will receive two weeks of severance pay for every year they have been with the company.

The employee would receive six weeks of severance pay at $750 per week. You would pay the fired employee $4,500 in severance pay ($750 X 6).

Continuation coverage

Health insurance coverage that you give an employee after they are terminated is known as COBRA (The Consolidated Omnibus Budget Reconciliation Act). COBRA coverage applies to private-sector group health plans and health plans provided by state and local governments.

Typically, if you have 20 or more full-time equivalent employees, you are required to offer COBRA. And, you must notify terminated employees of their continuation coverage.

Fired employees can typically be covered under COBRA for 18-36 months. They will receive the same coverage they received while at your business.

Depending on the insurance you have, you probably pay part of the premium and your employees pay part. When you fire an employee, the employee might be responsible for paying COBRA coverage. But, the fired employee will pay at the discounted group rate.

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When you fire an employee, you might need to cover their duties. This may require your employees to pick up some of the slack. Depending on the situation, filling the vacant position could lead to overtime.

Employees who need to add more work to their current job responsibilities might need to work over 40 hours per week. If they are nonexempt employees, you will need to pay them time and a half for time worked above 40 hours each week.

Let’s say you fire an employee, Ted. You need another employee, Barbara, to pick up some of Ted’s job duties so your business operations proceed as normal. As a result, Barbara works 45 hours per week. Barbara’s hourly rate is $13. You would need to pay Barbara five hours of overtime wages, which would add an additional $65 to her gross pay.

To fill the vacant position, you might also consider hiring a temporary employee. You will need to cover the cost of the temporary employee’s wages.

New hire

If you fired an employee because of performance and not because the position needed to be cut, you might be looking to hire a new employee to take their place.

Each time you recruit, hire, onboard, and train a new employee, you spend hundreds or thousands of dollars. In fact, the average cost-per-hire (how much it costs to fill an open position) is $4,700, according to SHRM’s 2022 report.

You might decide to hire a recruiter to help you source a new employee. Factor in recruitment fees.

Here are just some of the costs that go into hiring a new employee:

  • Recruiting and sourcing fees (advertisements, job board participation, background and drug tests, etc.)
  • The time it takes you to find, screen, and interview candidates
  • Recruitment fees
  • Salaries, benefits, and training

Miscellaneous costs of firing an employee

There are some other ways that firing an employee can cost your business, like lost productivity, low workplace morale, and even lawsuits.

Losing a set of hands on deck can cause other employees to work more than usual. That can lead to them not being as productive in their own duties.

Your business might experience a shift in morale when you fire an employee. Other employees might have been friends with them. When an employee morale dips, you might see less employee engagement and a slow in operations.

If an employee believes you fired them without justification, they could sue you. Firing an employee as an act of discrimination or breaking a contract without cause can cost you thousands of dollars in legal fees, or more if the employee wins the case. Always record things like performance reviews, and have an HR employee present during the termination meeting for proof that they were fired for a reason.

When you fire an employee, you still need to hold onto their payroll records. Patriot’s online HR software add-on stores employee records all in one place. And, it integrates seamlessly with our online payroll software. Try both for free today!

This article has been updated from its original publication date of August 16, 2017.

This is not intended as legal advice; for more information, please click here.

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