How to Understand and Calculate Employee Turnover Costs

how to understand and calculate employee turnover costs

In today’s dynamic world of business, understanding and effectively managing employee turnover is crucial for any organisation.

The costs associated with employee departure are not just monetary; they also include reduced productivity, overworked remaining staff, and, potentially, morale. It’s easy to see why gaining a comprehensive understanding of employee turnover costs can be a game-changer for your business strategy. 

Happy HR aims to simplify the concept of employee turnover costs and provide you with a step-by-step guide on how to calculate them. We’ll delve into the various components that make up these costs and share tips on how to use this valuable information to develop better retention strategies and create a more engaged, stable workforce.

Whether you’re a seasoned HR professional or a small business owner, this guide will offer valuable insights to help you navigate the complexities of employee turnover costs.

Understanding Employee Turnover

Employee turnover refers to the percentage of workers who leave an organisation and are replaced by new employees during a defined period. It’s a key metric for human resource professionals, and it’s often used to gauge the social health of an organisation.

Turnover can be voluntary or involuntary. Voluntary turnover occurs when employees willingly choose to leave, such as for a new job, retirement, or other personal reasons. 

Involuntary turnover happens when the organisation makes a decision, like in cases of layoffs or firings due to poor performance or misconduct.

A certain level of turnover is natural and can even be beneficial by bringing in fresh ideas and perspectives. However, high turnover rates can indicate underlying issues, such as poor management, low job satisfaction, inadequate compensation, or lack of opportunities for advancement. High turnover can also be costly due to expenses associated with hiring and training new employees.

How Do I Calculate Employee Turnover Rates?

Calculating the employee turnover rate is relatively straightforward. Here are the steps:

Choose a Time Period 

Decide on the time period you want to analyse. This could be monthly, quarterly, yearly, or any other period that makes sense for your organisation.

Calculate the Average Number of Employees

Add the number of employees at the start of the period to the number at the end, then divide by two. 

Determine the Number of Departures 

Count the number of employees who left the company during that period.

Calculate Turnover Rate 

Divide the number of departures by the average number of employees, then multiply by 100 to get the percentage.

Turnover Rate = (Number of Departures / Average Number of Employees)x 100


If a company started the year with 100 employees, ended with 110 employees, and 20 employees left during the year:

Average Number of Employees = (100 + 110) / 2 = 105

Turnover Rate = (20 / 105) x 100 = 19%

What Are the Impacts of a High Turnover Rate?

High employee turnover can have multiple impacts on a business, including:

Financial Costs 

These can be substantial as the company has to bear the cost of recruiting, onboarding, and training new employees. There are also costs associated with severance pay and administrative tasks related to turnover.

Productivity Loss 

When an employee leaves, their work must be redistributed among the remaining staff or left undone, resulting in reduced productivity. A new hire may also take time to become fully productive in their new role.


High turnover can lead to decreased job satisfaction and engagement, potentially sparking a vicious cycle of even higher turnover.

Knowledge Loss

Departing employees take knowledge and expertise with them that can take time to replace, if at all. This loss can impact the efficiency and effectiveness of organisational processes.

How Can You Address Employee Turnover and Improve Engagement?

Understanding and addressing the causes of high employee turnover can be crucial in mitigating these impacts and maintaining the health and success of your business. Keeping employee turnover low requires proactive and strategic actions centred around employee satisfaction and engagement. 

Recognition Within The Workplace

Regular feedback and recognition for their work can boost morale and motivation. It’s crucial to foster a positive work environment where employees feel valued and respected. 

Fair Compensation & Benefits 

Employees should feel they are justly rewarded for their effort and contribution. Whether monetary compensation or opportunities for professional growth, both are equally important, as they enhance skills and signal potential career progression within the organisation. 

Work-Life Balance

Overworked employees are more likely to leave, so ensuring that employees have ample time for personal activities can help retain them in the long run. Implementing these strategies can help keep employee turnover at a healthy level.

With Happy HR, stay on top of your employee turnover and make moves in the right direction with our all-in-one administrative HRIS system. For more information on our software, feel free to set up a demo today.