The True Cost of Redundancies

Last week the CIPD called for employers to delay making people redundant. They suggested that companies need to hold their nerve in the current downturn and make redundancies only as a last resort. The reason: Employers are not calculating the true cost of redundancy. We examine their advice and ask: Should you lay off making redundancies?

Businesses should be making more careful decisions about redundancy and taking into account plans for recovery by calculating the cost of retaining staff against laying them off according to John Philpott, the CIPD’s chief economist. With the cost of making an employee redundant averaging 18,000 Euro senior management should be asking themselves, what else could we be doing with that money? There is a need to balance the cost of redundancies against the potential benefits of retaining staff in the current environment.

Surely keeping employees on gives rise to a cost in itself? Of course it does. There is the cost of salary to start with, and also ‘hidden’ costs such as training, providing parking spaces, light and heat, etc.

But that is also where companies need to think creatively. They need to ask: What are the costs of letting staff go? These include making redundancy payments and ‘golden handshakes’, but should also (according to economists) include the costs of re-employing those same workers or others on the upturn.

Creative companies are offering staff sabbaticals instead. Permanent TSB, for example, gave some of its employees a two year ‘holiday’ and guaranteed jobs for workers on their return. This is a win-win situation, as the employer saves money in terms of redundancy and recruitment costs, and the employee has a chance to travel or do something alternative with their time secure in the knowledge that their job remains open to them on their return. The cost of making the average employee in an Irish bank redundant, and then hiring someone to replace them in two years time is approximately 50,000 Euro. By offering a sabbatical both parties can benefit.

Another option is to introduce short-time working or reduced hours. One professional services firm People Matters works with has reduced the number of hours their staff work in the week. Many of their employees are using their increased free time to study and learn new skills using facilities at the employer’s premises. The company is also using the opportunity to carry out maintenance of the office premises. Honda, Toyota and Nissan plan to halt production at their plants later this year and use the time for overhaul of their plants. HP has asked employees to take holidays in March and April (when their plant is less busy) and avoid the Summer shortfall in employees. This also avoids them having to employ part-time staff as replacements. Pay freezes and wage cuts, while unpopular, offer a better alternative to losing a job or losing a valuable staff member. One fashion retailer has asked employees to take a 10 per cent pay cut and most staff have shown a willingness to take the cut in preference to being made redundant.

According to the CIPD’s Philpott companies need to work out the real cost of redundancy before making any hard decisions. He has suggested a formula for calculating the RCoR (Real Cost of Redundancy). Before deciding on any redundancies People Matters recommends using his formula as a way to calculate the true cost:

RCoR = (N x R) + (X x H) + (X x T) + ny(H + T) + Wz(P-N)

Where:

N = number of people potentially being made redundant
R = cost of redundancy payments (circa 18,000 Euros)
X = number of people who will need to be hired in future
H = hiring costs (circa 16,500 Euros)
T = induction/training cost (average 3,500 Euros)
Y = percentage quitting post redundancy
W = average monthly staff salary
Z = percentage reduction in output among remaining employees due to low morale
P = number of people employed prior to redundancies