As a business, you want to be sure that you are getting the best out of your staff and their morale is positive. One of the measures that help managers assess this is the labour turnover rate.
Labour turnover definition
Knowing if employees want to keep working for the company is one of the most important indicators of employee satisfaction and overall health of the business.
Labour turnover is the percentage of a company's workers leaving the company over a given period of time (usually a year)
Relatively high labour turnover could be directly related to pay or organizational culture, among others, which could influence the employee to look for opportunities elsewhere.
Let's take a look at how labour turnover can be calculated, what causes it and the impact it can have on an organization.
Labour turnover formula
Labour turnover can be calculated by dividing the number of employees that leave during a period by the average number of employees employed during the same period. The formula for labour turnover is the following:
\(\hbox{Labour Turnover}=\frac{\hbox{Number of employees leaving}}{\hbox{Average number of employed }}\times 100\)
Company A manufactures bicycles. Last year company A employed an average of 50 staff. During this year, the company hired 10 staff to replace 13 that left.
Company A has a 26% labour turnover rate.
\(\frac{13}{50}\times100=26 \%\)
Labour turnover analysis
As you probably can guess, having a high labour turnover is not good for a business. Sometimes, employees leave a company for reasons that are outside the power of the company, for example retirement. Analysing labour turnover is, therefore, a very important task of human resource managers. Understanding the causes of employees leaving can help take right action and increase retention rate.
Labour turnover analysis can be divided into the following steps:
Collect the data
Calculate the turnover rate:
Identifying causes of turnover
Develop a plan of action:
Measure, and evaluate the impact of taken action
Once the human resource function of a company has explored labour turnover analysis and seen the problems, it can understand why the staff is leaving the business and look for ways to make sure it retains its best employees.
Causes of labour turnover
There are two main factors that influence labour turnover including avoidable causes and unavoidable causes.
Avoidable causes
Avoidable causes are related to the company's facilities and working conditions. These include factors that the management could adjust to retain the workforce. Examples of avoidable causes include:
Below-average working condition,
Dissatisfactory wages and allowance,
no retirement benefits,
Lack of job security,
Improper health and safety measures,
Conflict with supervisor or co-workers,
Poor transportation facilities.
Unavoidable causes
On the other hand, employees sometimes have to depart from the company for unavoidable reasons. Neither the organization nor the employee can take any step to avoid such events. Examples of unavoidable causes include:
illness,
accident
retired,
death
domestic issues,
community issues,
Misconduct of workers.
Effects of labour turnover
When one worker leaves a company, it might not affect the company at all, but if a company experiences a high labour turnover for a longer period of time, it might cause some serious consequences for the business. High labour turnover is usually associated with negative effects like lower productivity or a decline in morale, but it can also have a positive impact on a company. For example, new workers can bring new ideas and skills that can improve overall performance. The positive and negative effects of high labour turnover are listed below.
Positive effects
Developing company culture: labour turnover means that new staff will have to be hired. They may have different mindsets and values which develop the company's culture.
More talented workforce: new staff can be more knowledgeable, efficient, smarter, and active personnel.
Reducing costs: the company might hire new trainees for less money to replace experienced workers that have left.
A mixture of new ideas: the new staff could bring with them innovative ideas and ways of doing things, which is quite beneficial for business.
Negative effects
Slows down productivity: when a staff member leaves the job it could create a temporary halt or decrease in productivity until the new hire joins the business.
A decline in morale: the colleagues who are leaving for a better opportunity could make the existing staff feel demotivated.
Increased costs: training and teaching new staff will result in an increase in expenses.
Replacement cost: Recruiting new staff involves advertising, hiring, and training expenses.
Types of labour turnover
There are two types of labour turnover and they can be categorized based on whether the employee wanted to leave or whether the organization had to dismiss the employee.
Voluntary : This is when a staff member is willing to leave the organization.
The employee resigns from the role as they have found a better opportunity elsewhere.
Involuntary : On this occasion, the management has dismissed the worker due to reasons like not complying with the company's rules.
The employee had to leave the company as their performance was poor and contributed to a toxic work environment.
Reducing labour turnover
It is very important to reduce labour turnover as employees are the backbone of almost all businesses. Lower labour turnover can be achieved by:
1. Monitoring and benchmarking
Monitoring and assessing labour turnover will help companies keep track of trends over time and identify areas where labour turnover is high or particularly low. The company may set a specific standard of labour turnover goals they wish to maintain and assess how they are performing compared to the standard. This is known as benchmarking.
2. Conducting exit interviews
Another way to reduce labour turnover is to conduct proper exit interviews. Departing doesn't have to be a gloomy event for both you and your employees. In some cases, it can inspire change for the business and its selection process. For example, by asking meaningful questions during the interview (e.g. "Do you have any suggestion for improvement?", "What could we have done to stop you from leaving?"), you can identify the real causes that prompt people to leave. Then you can work to resolve the issue or pass on the information to the HR team to refine their recruitment process.¹
3. Strenuous recruitment and selection
Hiring the right people from the start can significantly reduce labour turnover. If people cannot fit in with the company culture, they will leave eventually, no matter how good the perks or salaries are. To find suitable candidates, you should invest more time and effort in the recruitment process. For example, conduct several rounds of interviews between the candidates and members of the team or assign them a project or problem to solve.
4. Onboarding and training
Giving new employees high-quality introduction and training will make them feel like they are an integral part of the organization. This will also help them fully understand the process of the company, meanwhile, the organization can gain an understanding of the new employee.
Labour turnover - key takeaways
- Labour turnover shows us the rate at which employees leave an organization.
- turnover can be calculated by dividing the number of employees that leave during a period by the average number of employees employed during the same period.
- Labour turnover can be caused by either avoidable or unavoidable factors.
- Labour turnover can be either voluntary or involuntary.
- The positive effects of labour turnover can include a more skilled workforce and a developed company culture.
- The negative impacts of labour turnover include higher costs and a possible decrease in morale.
- Reducing labour turnover can be done by:
¹ Monster Hiring, How to use exit interviews to reduce employee turnover, 2021.
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