Employment Screening: Return-On-Investment

If you’ve ever lost a great employee, you know it hurts in more ways than you can imagine. Ninety percent of employers use background screening as a final step in the recruiting process, which demonstrates the perceived importance of this best practice.

Employers of all sizes understand that a formalized background screening program will reduce insurance cost, improve employee retention, reduce the risk of workplace violence, and minimize occupational fraud and theft.

Employers turn to LaborChex to perform these checks to ensure they hire the right person, the first time.

Turnover, Unwanted vs. Wanted

Turnover is defined as the ratio of the number of workers that have to be replaced in a given time period to the average total number of workers employed during the same period.

In addition, the Employment Policy Foundation estimated that the cost of turnover is 25 percent of the salary plus benefits—and that’s the most conservative such estimate. Excessive turnover causes State Unemployment Taxes (SUTA) costs to rise.

Most experts agree that hiring the right people from the start is the single best way to reduce employee turnover. All companies expect there to be some turnover. Employees may move, retire, or leave the company for personal reasons unrelated to the company or their job. A small amount of employee turnover is also helps being in new talent and fresh ideas. However, if employees are leaving at a high rate due to reasons such as termination or poor work environment, this becomes a problem, not only because it costs the company money to recruit and hire replacements, but because a high turnover rate reflects poorly on the company and may prevent other people from wanting to work there.

Workers’ Compensation and Unemployment Insurance

The hard costs associated with employee turnover are workers’ compensation and unemployment.

When you hire employees, you not only have to pay their wages but will also have to cover the associated payroll taxes and workers’ comp. Payroll taxes include Social Security and Medicare taxes (FICA taxes) and unemployment taxes. Therefore, a positive correlation exists between a high employee turnover rate and a high workers’ compensation claim frequency, which can drive a company’s workers’ compensation costs through an increased experience modifier.

Assume your 50 employees earn total wages of $3 million. A 10 percent increase in an experience modifier can increase your workers’ comp costs by about $12,000 (assuming a rate increase from 3.62 percent to 4 percent).

The same holds true for unemployment claims. As employee turnover increases, so does the company’s State Unemployment Tax Act (SUTA) rate. For example: For 30 employees in the state of Mississippi, an increase in SUTA from 2.7 percent to 4 percent would result in at least $4,500 in additional costs.

State Unemployment Taxes are calculated for each individual employee each year. Each state has a wage cap used for the SUTA calculation that, once reached, stops the further liability for additional SUTA tax amounts. Each time an employee who has reached the SUTA wage cap quite and a new person is hired, the SUTA obligation starts anew for the newly hired person.

The net result is that employee turnover can be a significant factor in driving higher SUTA costs. It does not matter whether the person quit, was fired, or if they file an unemployment insurance claim. The SUTA liability is calculated on the wages (up to the wage cap) of every employee that worked during the year. Companies with high employee turnover and relatively low wages have the most SUTA financial impacted from turnover.

Occupational Fraud

Occupational fraud consists of asset misappropriations, corruption schemes, and fraudulent statements. Regardless of the employee’s level within the organization, or the sophistication of the plot, occupational fraud can always be thought of as a form of theft.

Harmful Events

Catastrophic events include workplace violence, sexual harassment, and workers’ compensation-related accidents that occur due to falsified qualifications or alcohol/drug use.

When these events compound, lawsuits and negligent hiring litigation nearly always follow.

With any catastrophic event also comes many costs. The largest direct costs of catastrophic events include higher workers’ compensation premiums, higher unemployment insurance rates, and higher medical premiums. Businesses will also need to pay to investigate the event, cover legal expenses and liability not covered by workers’ compensation, and any resulting fines or penalties from federal and state regulators. There are administrative costs associated with injuries and paid leave, as well as with recruiting, hiring, training, and onboarding new employees. Lastly, businesses will also need to replace or repair damaged equipment and property.

In order to reduce costs associated with turnover, businesses must determine the most common causes of employee turnover—both wanted and unwanted—and take the necessary steps recruiting, selecting, screening, and retaining the right person, the first time.

Implementing a formalized employment screening program will reduce cost associated with turnover, safety, increase productivity, and limit an employer’s liability, all at the same time. Trust LaborChex to perform the most comprehensive background screening services so you can build a stronger, more cohesive workforce.