Your employees are the lifeblood of your company, and one bad hire can severely impact your organization, which is why it is crucial to employ best practices when recruiting and hiring new employees. We spoke with business and legal experts to learn about the wide-ranging costs of hiring the wrong candidate, and five steps small business owners should take to handle it.
What is the cost of a bad hire?
The exact cost of a bad hire varies, depending on several factors like industry type, employee salary, recruiting resources, onboarding and training, lost productivity, etc. The U.S. Department of Labor claims a bad hire can cost your business 30% of your employee's first-year earnings; other HR agencies estimate the cost to be higher, ranging from $240,000 to $850,000 per employee.
"It's not just a matter of their pay or salary but also the resources used to train them and onboard them, which in some cases, can exceed the employee's pay in terms of monetary expense," said Jonathan Hill, chairman and chief executive officer of The Energists. "There are also intangible costs – clients or customers lost due to their mistakes, the impact on the mental health and stress levels of their co-workers, and the extra time spent by other team members to redo their poor work and salvage disrupted projects are the ones that come immediately to mind."
When you hire an ill-fitting employee, the cost extends beyond monetary value. A bad hire can impact your overall productivity, company culture and reputation. What's worse, said Charles O. Thompson, attorney and shareholder at Greenberg Traurig, the cost of a bad hire can skyrocket if the employee becomes disgruntled and engages in litigation.
How do you know if you made a bad hire?
There are several signs that indicate you've hired the wrong person for the job. Keep in mind that one of these signs alone does not necessarily mean you've made a bad hire. Rather, you have to analyze each case objectively, and consider the specific details and circumstances surrounding the employee you are evaluating.
Here are some red flags:
- The employee is not producing the quality of work you agreed upon (after the appropriate training and learning period).
- The employee does not have the skills they claimed to have in their interview (primarily, if these skills are pertinent to the job description).
- They are consistently underperforming and missing the necessary key performance indicators.
- The employee has a bad attitude, is frequently disagreeable or critical, or does not embrace company culture.
- They are chronically tardy or absent.
- The employee repeatedly makes the same mistakes.
- They blame others for their mistakes or failures.
- You receive recurring negative customer reviews or complaints about the employee.
- The employee consistently receives poor performance reviews.
"Anytime the capable and competent person you hired for a job fails to deliver (on projects, work, attitude or respect) consistently, they've become a liability for you," said Lindsay Teague Moreno, business owner and author of Boss Up! "Sucking up your time and company money, bad hires can quickly compromise the health and happiness of your business."
When hiring a new employee, it is important to properly train them on their projects and duties so they are equipped with the knowledge for success. Give them an adequate amount of time to take on their new responsibilities since there is bound to be a learning curve in the beginning.
Thompson said that certain manifestations may arise over time, though, that could not have been predicted in the hiring process.
"Employees may feel entitled, develop negative attitudes, not understand their role in the company, or may not be sufficiently adaptive to the business," said Thompson. "This may manifest itself in decreased morale in the group, missed deadlines, increasing errors, or customer complaints and poor work quality."
If your new employee is consistently demonstrating the signs of a bad employee after the learning period ends, identify if the employee is simply displaying unexpected behavior or if it's due to an error in your hiring process (e.g., you hastily hired without fully evaluating the candidate's skills and company fit).
How do you handle a bad hire?
If a new employee is starting to exhibit some of the red-flag behaviors, follow this five-step approach to resolve the issue.
1. Identify the problem and the reason behind it.
The first thing to do is evaluate and document the employee's performance. Identify trends and assess whether the issue is due to an error in your hiring process, or if it is the employee. Thompson said common hiring errors include rushing to fill a position, hiring based on a resume as opposed to a skill set, listing inadequate talent requisition skills or failing to check job references. If one of these internal hiring errors was made, you first need to revise your hiring process. You also want to assess your training process to ensure the employee has received the proper training.
2. Discuss the problem with the employee as soon as possible.
If the issue is stemming directly from the employee, discuss your concerns with them and allow them to correct their mistake. It is important to address performance and attitude issues as soon as possible so you can resolve them before they get out of control.
"Many companies have implemented management with more frequent performance reviews or performance improvement plans," said Thompson. "Many companies find that early action leads to the best chance of success, allowing an employee the opportunity to improve before they suffer irreparable reputational damage because they are not meeting the goals of the company."
3. Adjust employee responsibilities as needed.
If the employee is putting in a lot of effort but still can't reach their KPIs, they may not be the right candidate for that specific role. If they are a great employee otherwise, consider moving them to another role that their talents are better suited for. If the issue is more serious, stemming from a poor work ethic or bad attitude, the employee is unlikely to be a good fit long term.
"Attitude and work ethic are two things you cannot teach an employee," Moreno said. "If an employee fails to deliver a strong work ethic and a good attitude each day, it's time to part ways. Remember, your business is not personal, and you can't keep it going if you let the wrong people hang out at your place of business all day."
4. Look for a replacement employee.
If a new hire isn't working out, Hill recommends reviewing other potential qualified candidates before terminating the employee. However, don't contact anyone for interviews until you've made an official decision to terminate the employee, but it can be beneficial to have other potential candidates in mind, just in case.
5. Terminate the employee.
If you've conducted an analysis, discussed the issues with the employee, and are still seeing poor results, it may be best to terminate their employment. When terminating an employee, be kind, honest and direct. Make sure you comply with the applicable state and federal laws.
"Best practices should be used in terminating any employee," said Thompson. "Those could include managing against objective criteria, a careful assessment of the employee's performance, documentation of the performance, and inclusion of human resources and management in the decision-making process."
Can you fire a bad hire?
Yes, all 50 states and Washington D.C. are at-will employment states. This means that an employer can terminate an employee, or an employee can quit a job, for any reason without warning. Be mindful of complying with discriminatory protections like Title VII of the Civil Rights Act of 1964 (e.g., race, color, religion, sex or national origin), the Americans with Disabilities Act and the Age Discrimination in Employment Act of 1975.
Additionally, some states have exceptions that an employee cannot be fired for regarding public policy, implied contracts and implied-in-law contracts. Statutory exemptions may apply as well.
- Public policy exemption. You can't fire an employee if it would violate a state or federal statute, or the public policy doctrine of the state. For example, an employee cannot be fired for performing an action that complies with public policy or refusing to perform an act that violates public policy. This applies to every state except Alabama, Florida, Georgia, Louisiana, Maine, Nebraska, New York and Rhode Island.
- Implied contract exemption. You can't fire an employee if there is an implied contract between you two; however, this is difficult to prove. This applies to every state except Arizona, Delaware, Florida, Georgia, Indiana, Louisiana, Massachusetts, Missouri, Montana, North Carolina, Pennsylvania, Rhode Island, Texas and Virginia.
- Implied-in-law exemption (covenant of good faith). The definition of this exemption varies from state to state, but essentially, you can't fire an employee if there is an implied-in-law contract between both of you, for example, firing a tenured employee so they can't receive benefits. This applies to Alabama, Alaska, Arizona, California, Delaware, Idaho, Massachusetts, Montana, Nevada, Utah and Wyoming.
To reduce the potential for legal ramifications, Hill recommends protecting your business by including a probationary period in your employee handbook.
"A probationary period gives you a window in which to evaluate whether new hires are a good fit for your company and lets the employee know their long-term employment with the company isn't guaranteed if they're not effective in their role," said Hill. "A 60-day probationary period is a good amount of time to give a new hire a chance to be successful without allowing them to negatively impact your business."