Calculating Labour Turnover – What Employers Need to Know

Calculating Labour Turnover – What Employers Need to Know

Labour turnover has a significant impact on the productivity of businesses. Churn with staff not only affects long-term planning but can also impact on month-by-month costs, such as those associated with payroll, for example. At Snow, our managed digital payroll solutions are easy to use, provide exceptional security standards and mean error-free calculations are maintained with each payslip. This last point is incredibly crucial for many employers. When workers see errors – even minor ones – that need consequent adjustments in their pay, it can cause unnecessary resentment, something that will often lead to excessive labour turnover rates becoming the norm.

Find out what you need to know about labour turnover, not only from the perspective of running your pay and remuneration operation more effectively but from the wider context of the ongoing commercial well-being of your company. Small and medium enterprises (SMEs) can be adversely affected by high staff churn because they simply do not have the number of employees with the right skills required to cover breaks in employment continuity. Read on to find out what labour turnover is, how it is calculated, its primary causes and what you can do about it whether you run your own company, manage a subsidiary, are responsible for human resources within an organisation or you simply want to improve your firm’s productivity.

Labour Turnover – A Working Definition

To begin, it will be useful to understand what is meant by labour turnover in the context of the UK’s labour market. There are several ways to define labour turnover and this comes down to the length of time the turnover figure is derived from. Setting that aside for a moment, most professionals in HR agree that labour turnover is a figure that can be described in percentage terms. The percentage boils down to how many employees have left the employment of a company in a given period versus how many people – on average – have been employed by that firm in the same period.

As mentioned, the period in question can be very telling. If you were to look at figures covering a period when there were plenty of lay-offs and redundancies occurring, then you would necessarily expect a higher labour turnover percentage to be calculated. However, if you were to extend the period to a year or more, then the percentage might well be lower. For this reason, labour turnover rates are often used to compare two periods to determine whether the rate is going up, going down or staying about the same.

To be clear, there is little point in comparing a firm’s labour turnover rate in January of a given year with its performance in the third quarter of the preceding year. What is possible, however, is to compare January’s labour turnover figure with other Januarys when staff churn – following the awards of Christmas bonuses – can be higher. Equally, you can compare year-on-year or quarter-on-quarter figures with one another to determine the direction of travel with staff churn.

Finally, it is worth noting that the number of people leaving employment covers all employees regardless of their reason for leaving. Emphatically, it does not mean only people who have resigned to seek employment elsewhere or who have been fired. Redundancies, retirements and – should they occur – deaths-in-service must all be considered, as well.

What Is the Commercial Advantage of Calculating Labour Turnover?

As an employee or recruitment specialist working in a business, knowing about labour turnover helps with strategic decision-making. Calculating your labour turnover rate for the last month or year will not tell you much on its own. What it will give you, however, is a baseline rate from which you can establish trends. If you have a high labour turnover rate compared to your competitors, then you are going to be spending more on recruitment and retention than them, something that may affect your bottom line. Equally, if it is lower, then you may decide now is the time to expand given that your workforce is relatively stable.

Strategic thinking from understanding labour turnover doesn’t end there, however. If you compare the last three years, you will be able to determine whether or not you need to take measures to lower the rate at which employees are leaving your firm. Perhaps you have an ageing workforce which means you could face a skills crisis down the line and, therefore, need to invest not only in recruitment but training, as well? Maybe your firm isn’t paying the going rate in your sector and you need to up pay to stem the tide. Equally, your analysis may reveal an uptick in labour turnover in a particular month, such as following end-of-financial-year bonus awards in May. If so, new incentives need to be prioritised before such awards are made?

The bottom line is that high labour turnover leads to higher costs. Hiring and training new workers takes time, effort and investment. Simply put, it is often cheaper – and therefore more commercially viable – to retain the staff you have than replace them through unwarranted labour turnover. Without calculating it, though, you won’t know where you stand as a company.

How Is Labour Turnover Calculated?

As previously mentioned, labour turnover is a percentage figure derived from the number of workers leaving a firm compared to its average workforce. To get the right figure, divide the former by the latter and then simply multiply the result by 100 to turn it into a percentage. Record this figure and use it to compare it to a similarly calculated labour turnover rate for a similar period.

For example, if a firm begins 2024 with 100 employees but ends it with a total workforce of 120, then the average number of workers for that year is 110, assuming those who joined the company did so over the course of the year and not all in one go. In that year, there were no redundancies, but 5 workers left for new job opportunities, 4 retired and 2 were fired for gross misconduct. In this example, 11 workers left and 110 average employees were employed. To calculate the labour turnover rate, you simply need to divide 11 by 110 and then multiply the result by 100. In this case, the calculation would be (11÷110) x 100 = 10%.

If, in the previous year the corresponding average number of employees was 80 and 7 employees left the company, then the calculation would be (7÷80) x 100 = 8.75%. Anyone analysing these figures would be able to see that there has been a year-on-year labour turnover increase of 1.25% which indicates more staff churn.

What Are the Main Causes of Labour Turnover?

There are all sorts of reasons that labour turnover rates can increase. It is a relatively common problem for employers that all too often they fail to understand or take action over. The issues surrounding an individual’s departure from their place of employment can be complex, often pertaining to multiple professional and personal issues. The point about understanding your firm’s labour turnover rate isn’t to get to the bottom of these, but rather to understand where your company is going right and where it is going wrong with respect to staff turnover. The main issues you should be using your labour turnover calculations to highlight are:

– A negative employee experience. Some firms just don’t treat their workers in a way that they find satisfactory. If so, they are likely to see higher than average labour turnover rates.
– Pay and conditions. When you are not competing with other companies in your geographical location or sector, more staff will inevitably look for employment opportunities elsewhere.
– Poor career progression. If you workers feel they are trapped in their job with no way to progress their career – other than leaving – then it is likely staff turnover will suffer.
– Lacklustre onboarding. Companies that hire employees who don’t go on to enjoy a clearly laid-out induction process that helps them understand their role within the wider picture of how the organisation works may begin to feel undervalued quite soon after being hired which can lead to augmented staff churn rates.
– Mismanaged payroll. Some companies that have antiquated payroll systems or that make errors with their workers’ salaries will find that resentment can build among employees which, in turn, leads to more and more people choosing to leave.
– Bad human resources controls. If you are hiring people in a growing business but they don’t have the skills that match the work they’re being asked to do, then this can lead to poor staff retention rates which will, in turn, impact negatively on labour turnover.

What Measures Help to Improve a Poor Labour Turnover Rate?

If your company has discovered that its labour turnover rate is on the rise, then there are steps you can take to turn the situation around and lower the associated costs. One of the most important things HR professionals can do is to ask open-ended questions at exit interviews. As stated, there may be many varied reasons that workers have for leaving. You may find that common issues start to come up repeatedly. Once you have identified these, it is much simpler to take the necessary countermeasures. Often, maintaining staff retention levels is much more than simply needing to pay workers more. Pay may be important, but it is rarely the whole story and factors like holiday entitlement, demands on workers or even work-life balance may also be crucial parts of the picture.

Specific training in some areas can also help to turn around poor labour turnover figures. Maybe you are seeing more staff churn in one department or team. If so, maybe the supervisor or manager needs some help in improving their man management or communication skills. There again, some companies may have a culture where people work hard but don’t feel recognised for their efforts. Could awards or in-company recognition schemes help in this regard? Another issue might be late or mismanaged pay which includes the way overtime and bonuses are calculated. If so, make sure your payroll system is fit for purpose.

Overall, dealing with a poor labour turnover rate means acquiring more knowledge. Calculating your staff turnover is only the analysis that lets you know whether or not your company has a problem. What to do about it will take a degree of further investment in terms of your available resources. However, the effort involved is typically worth it because relatively simple steps can help to turn the situation around, diminishing the ongoing costs associated with recruitment and retention often with surprising speed. In short, there is simply no need to let matters slide when you have established your staff turnover rate is on the rise. Of course, all companies see employee churn to some extent but this does not mean that nothing can be done about it, especially when an organisation was performing better and now finds that it is seeing more and more people leave given the average numbers of workers on the payroll.

Summing Up What Employers Should Know About Their Labour Turnover Rates

Labour turnover is a straightforward issue that is simple to calculate. However, too many British firms don’t have a clear idea of what theirs looks like, nor the direction it is going in. By taking the time to calculate it, you can better manage the number of unnecessary departures from your company and take strategic steps that will mean your productivity and profitability do not suffer. In this respect, the benefits of investing in the right HR and payroll systems cannot be overstated. Find out more about how Snow’s UK payroll solutions can help your business and what the process of digitising your payroll can do to help with all aspects of labour turnover these days. Book a demo or talk to us about how our solutions can assist with your firm’s record with employee retention.

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