What is employee turnover and what causes it?

When you lose talented employees, your organization takes a hit. Keeping skilled workers around is essential to long-term success. So, what can you do to keep your team intact?

Many factors influence turnover. While you may not always be able to control external factors, you can focus on the internal factors that lead to employee turnover.

In this article, we'll define and explain the root causes of employee turnover, how to calculate turnover rates, and how to lower them by offering comprehensive benefits.

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What is employee turnover?

Employee turnover is when employees leave an organization for any reason, typically in search of better opportunities. However, it also includes the number of employees let go by the organization. An employee turnover rate accounts for how many employees leave a company in a specified time period.

There are two types of employee turnover: voluntary turnover and involuntary turnover. Voluntary turnover is when an employee leaves the organization on their own. This could be due to personal reasons, a better job, or a new career path. They could also choose to leave the workforce entirely.

Involuntary turnover is when you choose to part ways with an employee due to poor performance or company finances, either through layoffs or other forms of termination.

How do you calculate an employee turnover rate?

To calculate your employee turnover rate, add up the number of employees lost in a specific period of time. You'll also want to gather the average number of total employees you have.

The turnover calculation goes as follows:

• Subtract the number of any temporary or seasonal employees from each amount. Typically, employee turnover rates don't include temporary workers. They can skew your numbers.
• Now, divide the sum of employees who left by the average number of employees at your organization. Move the decimal two places (or multiply by 100) to get your turnover rate.

For example, suppose you lost five employees this year. On average, you have 30 employees at any given time. We’ll input these values into the equation below to calculate our turnover rate.

What is the average turnover rate?

According to the Job Openings and Labor Turnover Survey¹ conducted by the U.S. Bureau of Labor Statistics, the average total turnover rate was around 3.7% in April 2023, with 2.4% for quits and 1% for layoffs.

With unemployment rates at record lows, the U.S. has gone from around six unemployed people per job opening in 2009 to less than one unemployed person per job in 2022. That means workers have more job options available to them.

When unemployment is low, voluntary turnover tends to rise, and involuntary turnover tends to fall.

Although larger organizations have slightly lower turnover rates, smaller organizations may have a more vested interest in reducing their turnover rates because of the increased impact they feel when someone leaves.

The greatest variances are between industries. Hospitality and retail generally have a high turnover rate, while finance and insurance have less turnover.

The table provided by the U.S. Bureau of Labor Statistics² shows total separations by industry.

What causes employee turnover?

While there can be many causes for employee turnover, certain aspects of the employee experience tend to be the biggest drivers of turnover.

Some of the most common reasons for high turnover are:

• Pay and benefits
• Lack of professional development or career advancement
• Burnout
• Poor onboarding processes
• Poor management
• Feeling disrespected or unappreciated at work

Let's go over each in more detail below so you can combat these common challenges in employee retention.

Pay and benefits

Employee compensation is often a top reason for voluntary turnover. This is usually due to a lower-than-expected annual salary or a lack of raises. Inadequate employee benefits can also cause your talent to leave for better opportunities.

According to a Pew Research Center³ survey, 63% of workers quit their jobs in 2021 due in part to low pay. Additionally, 43% said poor benefits or a lack of benefits were factors in their departure.

To retain your employees, you need to stay updated on what your competitors are offering their employees. If your contenders offer a more comprehensive benefits package or a more competitive salary, they'll entice your employees to apply.

Establishing yearly cost-of-living wage increases and offering benefits is a great way to keep your employees engaged and improve employee satisfaction.

Lack of professional development or career advancement

Nobody wants to feel stuck in a rut at work. Employees value organizations that provide career advancement opportunities. Education benefits or promotions can foster your employee's career growth and development at your organization.

According to LinkedIn's Workplace Learning Report⁴, 94% of employees said they'd stay at an organization longer if it invested in their careers.

Additionally, according to the same Pew Research Center survey, 63% of employees who quit their jobs in 2021 said a lack of opportunities for career advancement was a reason for quitting.

Poor promotion practices create staff turnover because people feel like management passed over them. To combat this, organizations need to communicate open opportunities with employees and prioritize promoting within.

Speak to internal candidates who weren't selected for a promotion or new role as soon as possible to preserve your relationship. Be prepared to address any concerns or questions they may have. Work with these employees to share what they're doing well and what they can work to do better next time.

Encouragement and recognition are key for retaining employees in these situations.

Burnout

A job is important, but it often isn't everything to your employees. Your employees have a life outside your organization, and they shouldn't spend all of their free time working. If your employees constantly put in overtime, don’t take breaks, or never go on a vacation, their work-life balance will suffer.

While this can lead to employee turnover, there are other adverse effects. Burnout can also cause physical and mental health issues such as depression and heart problems for your employees.

To avoid employee burnout, you can offer breaks, paid time off (PTO), or flexible schedules. You should also set realistic expectations for your employees.

Poor onboarding process

Onboarding is a way to set your new hires up for success by providing them with all the information and resources they need to do their jobs effectively. However, some organizations fall short of this goal.

According to the Society for Human Resource Management⁵ (SHRM), the absence of an onboarding process results in lower productivity and higher employee turnover. While most organizations want new hires to feel welcomed, culture integration only accounts for 27% of onboarding processes.

To avoid a high new hire turnover rate, your hiring process and onboarding process should help new hires feel welcomed and prepared. Introduce your new employees to their co-workers and show them around. Answer any questions they may have, and inform them of any employee perks or benefits.

Poor management

In a recent report from GoodHire⁶, 82% of employees said they would potentially quit their job because of a bad manager. If a leader's management style is critical or combative, it doesn't create a positive work environment. Profits, job performance, and turnover rates all take a hit when a company's culture turns toxic.

To keep this from happening at your organization, keep an open line of communication with your employees. Fostering two-way communication between managers and employees is essential for your organization’s growth and prosperity. Plus, some of the happiest employees are those who feel seen and heard by their managers.

Feeling disrespected or unappreciated at work

The Pew Research Center found that 57% of employees who left their jobs in 2021 cited feeling disrespected at work as a reason for quitting.

Organizations need to promote an inclusive company culture where everyone feels welcome and appreciated. When employees have the chance to connect with one another and with management on a personal level through activities, they'll feel happier and less likely to leave.

You can show your employees you value them by celebrating their successes and efforts year-round. This could be through compliments and words of encouragement or employee recognition programs.

Employee happiness is a major indicator of job satisfaction. Investing in your employees' happiness and making them feel valued can help you keep them engaged and productive, reducing employee turnover.

What are the real costs of employee turnover?

Losing an employee comes at a price, especially for small businesses. High employee turnover can lower employee morale, which damages employee culture.

Since you'll be down a team member, other employees must pick up the slack. This leads to increased workloads for your remaining employees. This can decrease overall productivity and lead to employee burnout.

However, the greatest turnover cost is the expense of hiring a new employee to take their place. According to Built In⁷, the average cost of replacing an hourly employee is $1,500. And this number only scratches the surface, as certain positions will cost more to replace.

Which benefits reduce employee turnover?

With benefits playing a major role in why employees quit their jobs, it's important to offer perks your employees want. This section covers some of the best employee benefits you can include in your employee retention strategy.

Health benefits

Health benefits are one of the most desired perks you can offer.

Traditional group health insurance is an option for businesses that want to provide comprehensive coverage to their employees. However, the lack of flexibility in a group health plan can put some employees at a disadvantage. Group health insurance may not be cost-effective or easy to manage for many small to medium-sized businesses.

Employees increasingly desire flexibility in their workplace, and that includes perks. Offering personalized health benefits allows your employees to choose how they want to use their best.

Health reimbursement arrangements (HRAs) and health stipends are often better options for businesses because of the flexibility and cost savings they provide.

With an HRA, you reimburse employees for their qualifying medical expenses, such as out-of-pocket expenses for prescriptions or office visits. Depending on the HRA you offer, you can also reimburse employees for their individual health insurance premiums. That way, your employees can purchase the coverage that best fits their needs.

You set monthly allowances for your employees to use on their medical expenses, with unused funds rolling over until the end of the benefit year. These reimbursements are tax-free for both employers and employees.

Three of the most popular types of HRAs include:

• Qualified small employer HRA (QSEHRA)
• Individual coverage HRA (ICHRA)
• Group coverage HRA (GCHRA), also known as an integrated HRA

Health stipends are another great option for businesses of all sizes. Like with an HRA, you can offer your employees a monthly allowance for their medical expenses. However, health stipends are taxable. You have to report them as additional income on your employees' W-2s.

A health stipend is an excellent option if your employees receive advance premium tax credits, as they'll be able to claim their APTC and use the full health stipend benefit. You can also offer stipends to international employees and 1099 contractors. Otherwise, HRAs are often better for businesses because of their tax advantages.

Wellness benefits

Offering your employees a wellness benefit is a great way to reduce employee turnover. Wellness perks help boost employee productivity and employee engagement by reducing stress and improving your employees' overall well-being.

Some businesses create comprehensive wellness programs featuring in-office classes, mental health counseling, and fitness programs, just to name a few examples.

Instead of creating a wellness program, you can offer your employees a wellness stipend. Wellness stipends help you easily offer an employee benefit while giving your employees control over how they use their benefit.

You give your employees a monthly allowance for wellness expense reimbursement with a wellness stipend. This could be for gym memberships, fitness classes, exercise equipment, and more.

Remote work

Allowing your employees to work from home is another great way to reduce employee turnover. According to Pew Research Center⁸, 59% of Americans who can do their jobs from home are working from home at least most of the time. That's partly because 64% of remote workers feel it's easier to balance work and personal life in a remote work environment.

If your employees are remote or hybrid, you should provide them with a remote work stipend. This allows you to reimburse your employees for their home office setup costs, monthly internet bills, and cell phone bills if they use their devices for work.

This additional employee perk helps ensure that your remote workforce has a stable internet connection and the tools they need to do their jobs effectively.

Professional development

PeopleKeep's 2022 Employee Benefits survey found that 61% of employees value professional development benefits, while only 40% of employers offer them. That means a professional development stipend can give you a leg up on your competition.

You invest in your employee’s future success when you offer them a professional development stipend. It can be used for a variety of learning opportunities, which gives your employees the freedom to learn their way. They can use their stipend to pay for certifications, online courses, conferences, career coaching, college courses, and more.

Conclusion

Various factors cause employee turnover. Luckily, many of them are controllable. Understanding common causes of employee turnover and how to avoid it can help you retain your employees and improve their well-being at the same time. If you want to know what's driving your workers to leave, consider conducting an exit interview.

When you give high-performing employees the opportunity to move up in your company, you give them a reason to stay. You can also provide a great onboarding experience, recognize accomplishments, and offer competitive compensation and benefits to help reduce employee turnover at your organization.

If you're ready to offer enticing perks to your employees, PeopleKeep can help! Our HRA and employee stipend administration software helps organizations like yours create and manage flexible employee benefits in minutes.

Schedule a call with a personalized benefits advisor today to see how employee benefits can work with your organization!

This blog article was originally published on January 21, 2020. It was last updated on June 27, 2023.

1. https://www.bls.gov/jlt/latest-numbers.htm
2. https://www.bls.gov/news.release/archives/jolts_03082023.htm
3. https://www.pewresearch.org/fact-tank/2022/03/09/majority-of-workers-who-quit-a-job-in-2021-cite-low-pay-no-opportunities-for-advancement-feeling-disrespected/
4. https://learning.linkedin.com/resources/workplace-learning-report-2018
5. https://www.shrm.org/resourcesandtools/hr-topics/talent-acquisition/pages/employers-new-hires-poor-onboarding.aspx
6. https://www.goodhire.com/resources/articles/horrible-bosses-survey/
7. https://builtin.com/recruiting/cost-of-turnover
8. https://www.pewresearch.org/social-trends/2022/02/16/covid-19-pandemic-continues-to-reshape-work-in-america/