Whilst it is a well known adage that an organisation’s best asset is its people, not all organisations protect and invest in that precious asset. We don’t think twice about upgrading and investing in our equipment, brand, marketing and software. But often, spending on people – their skills, how they treat each other, and how we manage their performance and conduct – is seen as a ‘nice to have’ rather than a necessity. Some employers assume that staff can look after themselves, ignoring the signs of latent problems. Some employers don’t realise the risks they are carrying, and the high cost of fixing the damage done, until it’s too late.
In a case study which is typical for many clients of Worklogic, the costs of misconduct for one employee were $209,800 – $337,800, while the cost of simple steps to minimise the risks of misconduct across the organisation was only $12,500. Not only were the preventative steps cheaper, they also had far broader positive effects, and impacted on a large group of employees. (See the case of Luke Nguyen, outlined at the end of this article.)
So, what financial loss do employers really incur from workplace misconduct? Given that any reduction in these costs can improve the organisation’s profitability, what can managers do to minimise or avoid these costs?
Costs of Replacing a Departed Employee
When an employee leaves due to their own misconduct or through frustration with the employer’s inability to deal with another employee’s behaviour, it is ultimately the employer who pays.
State and Federal Government estimates indicate that the organisational turnover costs per person are between 50 and 200 percent of that person’s annual salary, depending on the skills and experience required. Based on the average weekly income for full-time adults of $1,272.50 ($66,170 per annum), this means replacing one employee is likely to cost businesses between $33,085 and $120,340. This does not include legal costs, settlement of claims, increased insurance premiums and other flow-on costs of disputes outlined in this article. These costs rise exponentially as the employee’s influence on company decisions increases.
The costs associated with recruitment and turnover include:
- Loss of the specialist knowledge of the departed employee and the prior investment in training and developing that person (their new employer will enjoy this benefit)
- Advertising and headhunting costs
- Time spent by team members covering any gap before the replacement starts
- Time spent by management on interviewing new candidates
- Time spent in the HR administration of the departure of the staff member and the start of the replacement
- The costs and time spent training and inducting the new employee
- Legal fees
- Termination payouts
- Loss of relationships with customers and stakeholders which have to be rebuilt
The costs of turnover in the private sector are similar. For example, at law firm Blake Dawson Waldron, the head of HR conservatively estimates that replacing a lawyer with five or more years’ experience, costs the company at least $75,000: “We cannot afford to train up good lawyers who build relationships with our clients – and see them walk out the door after a couple of years with no intention of returning”.
Other studies have emphasised the time taken for the new recruit to reach their optimum efficiency and effectiveness on the job. The average replacement hire takes 18 months to have an impact.
Unchecked employee misconduct impacts those who continue to work for the organisation, leading to a loss of employee morale, the emergence of a culture of apathy and negativity, and associated loss of productivity. Lower team morale and decreased productivity are two of the biggest consequences of employee misconduct. Any line manager will tell you that when there is dissent and conflict in the ranks, people will not work at their optimum level of performance. Furthermore, people in conflict often show signs of stress and other illness. An insurer’s survey exploring the costs of workplace stress found that healthy employees are three times as productive as unhealthy employees.
Absenteeism, stress leave and sick leave
Stress-related absenteeism and ‘presenteeism’ are costing Australian employers $10.11 billion annually. A Melbourne University and Vic Health Partnership reported that job-stress related depression is costing the economy $730 million a year due to absenteeism and ‘presenteeism’, not including compensation claims.
According to the National Health and Safety Commission, work-related stress accounts for the longest stretches of absenteeism, and compensation claims for stress are among the most costly for employers, currently running at $200 million per year in Australia.
The costs per employer can be hard to quantify, but research indicates that the average direct salary cost of sickness absence in Australia is over $2,000 per employee per annum. Absenteeism costs are not going away: the cost of absenteeism rose by over 25% between 2000 and 2006.
Costs of Managing the Misconduct
For those line managers and HR staff trying to manage the inappropriate conduct and its fallout, the loss of time can be significant. A Victorian Government Report on Workplace Disputes in the public sector found that between 30-50% of a manager’s time is spent on workplace conflict.
Employers may also be faced with compensation claims by employees affected by workplace bullying, sexual harassment and other misconduct. Just this month it was reported that IBM is facing a $1.1 million law suit by one of its senior sales consultants, for allegedly failing to act on repeated complaints of bullying and sexual harassment.
A Victorian Government report on workplace disputes in the public sector found that:
- While only 7% of total compensation claims are attributable to stress, this accounts for nearly 27% of total compensation liabilities;
- The average cost for a stress related claim is $115,000; and
- Roughly double the amount of compensation is paid to stress-related complaints compared to physical injuries.
At Worklogic, we frequently see stress claims result from concerns about bullying, discrimination and sexual harassment, and also resulting from the way the employer has managed the misconduct. Anecdotally, employees find that a stress claim lodged through the WorkCover system is easier, cheaper, less time-consuming and more certain in outcome than a complaint of sexual harassment or discrimination through an anti-discrimination commission, or a breach of contract claim. While WorkCover insurers are becoming more stringent in their assessment criteria for stress and bullying, these claims are always time-consuming and costly for the employer to respond to.
The culture of an organisation and the way it deals with employee misconduct can significantly affect its brand and reputation. Being seen as an employer that values its staff means it is easier to attract and recruit good staff, and it also makes the company more attractive to its customers. No one wants to save their money at a bank which is seen to allow fraud, or buy goods from a retailer that leaves unchecked its employees’ breaches of safety and quality standards.
Employee misconduct can attract adverse media publicity, which in turn can have a significant impact on the way the company’s brand is perceived. No matter what the final payout was to Ms Fraser-Kirk, David Jones suffered far more in damaging publicity from the very public complaint of sexual harassment against their former CEO, particularly given that the majority of its customers are women.
In this age of social media, it is all too easy for employees to broadcast their concerns of ethical breaches to hundreds of people, and also to make public their own misconduct. Recently the Australian Defence Force has had to manage the fallout of not only in-person sexual misconduct, but homophobic slurs of ADF colleagues on Facebook. These days disgruntled employees can quickly and easily voice their concerns to a broad audience.
Avoiding Unnecessary Costs
So, given the high costs and risks associated with inappropriate workplace behaviours, what can employers do proactively to avoid and contain them?
Employers can start by asking themselves: when was the last time we…
- Undertook a review of the incidence and causes of employee complaints?
- Trained our managers in recognising bullying and sexual harassment?
- Reviewed the company’s policies for currency, relevance and usability?
- Considered the “noise” coming through employee surveys, reviews of HR data and exit interviews?
- Considered ‘If there was one factor in this workplace causing turnover and absenteeism, what might it be?’
Worklogic is happy to meet with you without charge to discuss any latent issues that are causing you worry in your workplace, or ideas you have for preventing misconduct and its costs. As this article has shown, there is much employers can do to stop the damage before it starts.
Case Study – Luke Nguyen and the ‘Edgy’ Culture *
Let’s consider the case of Luke Nguyen, a mid-level sales manager at a fast moving consumer goods company. Luke earns $85,000. In the 6 years that Luke has been with the company, he has built up great relationships with suppliers and retailers. He knows all the products and sales strategies inside out, and he also has solid relationships with his direct reports who learn a lot from him. Luke has been increasingly annoyed by the homophobic jokes that circulate around the office, and although he has raised this with his manager and HR, they are not too concerned because they think Luke is tough enough to look after himself. They think ‘The culture can be a bit ‘edgy’, but that’s sales, right?’.
The jokes turn into teasing and mocking comments at work functions, then one Friday night things get out of hand. Luke gets into a heated argument with one of the state managers, and punches are thrown. Luke needs stitches to his eye and takes a period of stress leave. Then Luke’s manager Karen is surprised, and very disappointed, when she receives notice that Luke has resigned. Karen knows that it’s hard to attract quality staff in any market, and particularly people as capable and knowledgeable as Luke.
Karen has invested in him over the years, with training and networking opportunities which he deserved, but now she’s without her right hand man. HR is also shocked when they receive a complaint from Luke that the company had a homophobic culture with a history of ignoring complaints. Luke has made a claim for damages and medical costs due to stress, accusing the company of breaching his employment contract and company policies. The policies say that the company takes discrimination and safety seriously and ‘will not tolerate racist, sexist or homophobic conduct’. The managers hate to admit it, but they all know that Luke is right. They start to wonder how many other employees they are at risk of losing, and how much money they might have saved if they had seen Luke as an investment that needed to be protected.
The managers realise that for the cost of just one departing employee, they could have implemented measures which could avoid the costs of many staff complaining, leaving the company, taking sick leave and making WorkCover claims.
When Luke posts on his Facebook page ‘Finally resigned – thank God – the last time I’ll work for a homophobic hellhole like [company]!’, word reaches upper level management. They are sure that Luke’s 134 Facebook contacts are not the only people who will hear Luke’s criticisms, particularly given that one of Luke’s friends works at The Age…
* Worklogic frequently works on cases with facts like this, however this case study is a fiction for the purpose of illustrating the real costs of ignoring the risks of inappropriate workplace conduct. The costs are estimates/averages only. Actual costs vary from case to case depending on complexity.
 Government of Western Australia Department of Commerce Labour Relations, 2010; Federal Government statistics reported in Australian Centre for International Business, “The Diversity Dividend”, Diversity No 6, 2002.
 Australian Bureau of Statistics, ‘Key National Indicators’, November 2010.
 Case study published on the website of the Equal Opportunity for Women in the Workplace Agency: http://www.eowa.gov.au/Australian_Women_In_Leadership_Census/About_Equal_Opportunity/Why_EO_Makes_Business_Sense/Five_Ways_EO_Boosts_Profitability/Attract_and_Retain_the_Best_Talent.asp
 Simon Boulton, Aequalis Consulting, “Hiring – the true cost of getting it wrong”, Yahoo Finance.
 Boulton, ibid.
 Medibank Private, “The Cost of Workplace Stress”, August 2008.
 Medibank Private, ibid.
 Apsely Recruitment, “Absenteeism: The Problem and its Prevention”, 2007.
 Direct Health Solutions ‘2006 National Health and Absence Survey Report’.
 Direct Health Solutions, ibid.
 Victorian Government Public Sector Standards Commissioner, “Taking the Heat out of Workplace Disputes”, State Services Authority, 2009.  HR Report, Thomson Reuters, Issue 487, Wednesday 20 April 2011.
 Victorian Government Public Sector Standards Commissioner, “Taking the Heat out of Workplace Disputes,” published by the State Services Authority (Vic), 2009.
 Nick Mckenzie, ‘Gay soldiers blast ‘savage’ online hate campaign’, The Age, 14 April 2011.