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“Cheap” HR Usually Ends Up Costing More

It seems everyone is trying to save a buck where they can. The same can be said for business owners. Many are making do with less — cutting corners to cut costs and stretching their staffs to stretch their budgets.

But when companies try to manage their human resources or human capital on the cheap, the result is often anything but savings. The price of cutting corners can be steep, with escalated risks, decreased productivity, increased turnover and ultimately higher costs.

The Risky Business of Noncompliance.

The current lackluster economy shouldn’t be the only thing affecting business owners’ decisions. In today’s legal environment, HR compliance should be a constant consideration. Employment laws, such as the Fair Labor Standards Act, the Equal Pay Act, Employee Retirement Income Security Act and the Occupational Safety & Health Act, govern, among other things, how companies hire, schedule, compensate and generally behave toward their employees. Adhering to these and other government regulations is the prudent way to protect your business from risk.

Take for example the Fair Labor Standards Act, or the more generic moniker, “wage and hour laws.”
Wage and hour violations are a common noncompliance issue for companies. As a result, class-action lawsuits against employers are rampant. Allegations include employers’ failure to pay minimum wage, unpaid overtime and inaccurate exempt or nonexempt employee classifications. The cost of noncompliance can be significant. According to one report, the average settlement per case is nearly $13 million.

Corporate Anorexia and the Cost of Turnover.

Recent employment figures suggest companies remain reluctant to hire. In a lean economy, making do with less is simple common sense, but when companies try to operate with too little staff, the unhealthy result is what some experts call “corporate anorexia.”
Remaining employees are expected to wear multiple hats and carry a heavy portion of the company’s workload. As a result, they can become less productive over time.

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When consistently stretched too thin, the most marketable employees eventually look toward greener pastures. And since the most marketable are usually the most experienced and highest performing employees, the cost of losing them can be significant. Experts estimate that turnover costs companies anywhere from one-half to five times an employee’s annual wages depending on his or her position within the company.

If that sounds like an exaggeration, consider the hard costs of recruiting and training a new employee. Add to that the softer costs of lost productivity and lost opportunity. And if you are still not convinced, do the math. Assume the average salary at a midsize company with 500 employees is $60,000 per year. With the cost of turnover at 150 percent, it would cost the company an average of $90,000 for every employee that leaves.

Cost-Saving Solutions.

Why would business owners ever choose to ignore employment laws? Or risk losing their most experienced staff? For many, it’s not a conscious choice, but an unavoidable outcome. They are trying to manage the business of running a business, and their HR function is often severely understaffed or nonexistent. How can they be expected to stay abreast of constant changes in employment law, effectively manage human capital needs, or juggle the time-intensive recruiting and hiring process?

When limited means dictate cutting corners, focus on the fundamentals. In HR, the fundamentals should include a solid employee handbook and regular compliance audits. A handbook is the first line of defense in employee matters, outlining company policies and establishing a guideline for behavior. Regular compliance audits can help ensure a company is properly meeting its obligations under applicable employment laws and identify potential risks before they become costly oversights.

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Business owners can also augment their HR by outsourcing a part or all of the function. Professional employer organizations and HR outsourcers employ human resource professionals who have extensive knowledge and experience in a variety of HR disciplines, so they can understand and help manage the nuances of HR that an in-house person may not be trained nor have time to manage properly. Recruiting and hiring, compliance and workers’ comp are just a few HR specialties many companies can easily outsource.

Cutting costs can be smart, maybe even necessary, but cutting corners on critical functions or cutting too deep into staff can backfire if it exposes your business to unnecessary risks and leads to greater costs. If you can’t cover all the bases, make HR a priority. Focus on the fundamentals and enlist assistance where needed.

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