What is employee turnover? And how to manage it

Employees leaving can have a big impact on an organisation's productivity, finances, and morale – especially in a small business where just one employee can make up a large portion of the workforce. 

With the Great Resignation in full swing and 44% of workers saying they plan to look for a new job in 2022, taking steps to retain your best people is key to staying ahead of the competition.

This is where tracking employee turnover can help.

Employee turnover: Meaning

Employee turnover is a measure of how many employees have left your business over a period. This includes voluntary resignations as well as employees being asked to leave for any reason, such as redundancy.

High employee turnover is often linked with low productivity and can impact your business’s performance, which is why it’s important to understand your employee turnover rate.

That said, it’s normal to have some level of employee turnover. After all, employees’ lives and career priorities change, and so do your business needs.

Types of employee turnover

There are four main types of employee turnover:

1. Voluntary turnover

This is when an employee voluntarily decides to leave your organisation, such as finding a job elsewhere, taking extended time off, or for other personal reasons.

If an employee leaves voluntarily, consider:

• Their reason for leaving
• Whether you could have done anything differently to retain them
• How losing them will impact your business

2. Involuntary turnover

Involuntary turnover is when an employee is asked to leave a job, for reasons such as poor performance or being laid off. 

Taking time to hire the right staff can help reduce involuntary turnover, although it’s not always entirely avoidable – particularly if your business is changing direction or restructuring.

3. Retirement

Retirement is another unavoidable type of employee turnover, but fortunately it’s not a negative one. The employee won’t be going to a competitor, and ideally, they’ll be around to do a thorough handover to the person filling their shoes.

4. Internal transfers

Internal transfers are usually a desirable type of employee turnover because it means your employees are growing with your business – a sign of a healthy retention strategy.

Causes of employee turnover

While employee turnover is normal and even positive in some situations, you don’t want to see your best employees leaving. 

There are several potential causes of unwanted employee turnover, including:

Employee burnout

Employee burnout can cause emotional and physical exhaustion and quickly lead to disengagement, low morale and employee turnover.

Burnout can happen if employees:

• Don’t have the support and tools they need to do their jobs effectively
• Feel they are being micromanaged or bullied
• Are consistently expected to work overtime or go above and beyond the scope of their role
• Are pushed to deprioritise their personal lives in favour of work responsibilities

Low pay and/or benefits

While money isn’t the be-all and end-all of employee satisfaction, studies have consistently shown that inadequate pay or benefits is one of the top reasons employees choose to leave their job.

Paying a fair salary and providing good benefits not only shows you value employees’ contributions but also makes it more difficult for competitors to financially incentivise your employees to join them.

Weak culture

Cultural issues such as micromanagement and weak team dynamics are key drivers of employee turnover. One report found that culture-based employee turnover cost US organisations an estimated $223 billion between 2015-19.

On the flipside, focusing on building a flexible, supportive and open culture can help foster a sense of belonging and ensure employees want to stay where they are.

Low engagement

It may sound obvious, but low employee engagement is one of the major causes of employee turnover. Employees quit because they’re bored, they’re disconnected from their work or they feel their efforts aren’t being recognised. 

Leaders and managers should encourage engagement by providing support and feedback, championing the company’s purpose, and providing opportunities for development and growth.

How to calculate your employer turnover rate

Your employee turnover rate is the percentage of employees who leave your business during a certain period.

To calculate your annual employee turnover rate, use the following formula:

    Number of employees who left

–----------------------------------------------- x 100 = Annual employee turnover rate %

(Beginning + ending number of employees) / 2 

Example: 

Let’s say you had 10 employees at the start of the year and hired two employees during the year. Four employees also left your business during the year, giving you eight total employees at the end of the year. 

In this case, your employee turnover rate would be:

    3

–---------- x 100 = 33.3%

(10 + 8) / 2 

It’s useful to compare your turnover rate against previous years for your business, as well as averages for your industry. For instance, if your turnover rate is high compared to your industry average, it’s a good indication that you could improve your strategies for retaining staff.

How employee turnover can impact your business finances

A high employee turnover rate can have big consequences for your business finances. 

According to Gallup, the cost of losing an employee is one-and-a-half to two times the employee's annual salary.

Some of the other potential cost implications to consider include:

• Job adverts, interviewing, screening and hiring
• Onboarding, training and equipping new employees
• Lost productivity during the handover and training period

While employee turnover can’t always be avoided, you can minimise the risks by staying on top of your turnover rate and taking steps to retain staff. 

Analysing your labour costs can also help you better manage your business finances so you’re operating as efficiently as possible. QuickBooks job costing enables you to track details like expense, income, time, and labour in one smart dashboard.