What Is Employee Turnover & Why It Matters for Your Business

How successfully a company hires, onboards, manages and rewards its people is fundamental to success. These factors are too important to leave to chance, so the most successful firms use data to ensure excellence: They compare their attrition rates with national and industry-specific benchmarks. They hold managers responsible for keeping the lines of communication open with their reports. They actively manage their career development programs and look at total compensation metrics in context of the cost of replacing top performers.

What Is Employee Turnover?

Employee turnover refers to the total number of workers who leave a company over a certain time period. It includes those who exit voluntarily as well as employees who are fired or laid off—that is, involuntary turnover.

Turnover is different from attrition. When calculating attrition, force reductions and terminations are not counted.

Key Takeaways

• Turnover measures separations—employees who leave a company—within a certain time period. Separations include everyone who is no longer with the company, regardless of the reason.
• Turnover is broken down into two types: voluntary, where people leave of their own volition, and involuntary, where people have been terminated or were part of a seasonal layoff or reduction in force.
• Employees who voluntarily leave their jobs are often seeking more money and better benefits, career progress, a more optimal work/life balance, or to escape an ineffective or toxic manager.
• Turnover is expensive: Gallup pegs the cost at between one-half to two times the salary of the employee being replaced.

Employee Turnover Explained

Turnover, especially the voluntary variety, impacts a company’s ability to achieve business objectives and is a key concern for executives. The reasons people leave vary, and companies can’t always stem the tide.

One attrition driver is demographics: Retirements of baby boomers hit a record 28.6 million in the third quarter of 2020, with Pew Research showing 3.2 million more boomers retired compared with Q3 2019.

Meanwhile, millennials, who now make up nearly 40% of the U.S. workforce, don’t stay at their jobs as long as previous generations did. The U.S. Bureau of Labor Statistics says the median tenure of workers aged 55 to 64 is 9.9 years. That’s more than three times the tenure of workers ages 25 to 34 years, which is just 2.8 years.

Among workers ages 60 to 64, 54% had been employed for at least 10 years with their current employers in January 2020, compared with just 10% of those ages 30 to 34.

Then there’s the issue of supply and demand. For certain roles, and in certain geographies, there aren’t enough people with the right skills to fill open roles. We’ve seen perennial shortages of medical professionals, scientists and mathematicians, skilled tradespeople, engineers and many IT specialties. It’s widely agreed that many of these shortages will persist even with higher than normal unemployment rates.

And finally, people want more from their employers—and not just money. Recall that guaranteed lifetime employment is no longer on the table for most professions. Even baby boomers are looking for more than a steady paycheck and say working for a company with a purposeful mission is a top priority. Across the board, LinkedIn’s Talent Trends 2020 survey shows that people want to work for companies and with people that inspire them. Today’s workforce also values flexibility and time-off, as well as a clear career path complete with the training to steadily advance and remain marketable.

What Do Turnover Rates Tell Us About a Business?

Turnover rates must be viewed in context, as certain industries, such as hospitality and retail, traditionally have higher than average employee churn. A company can and should benchmark its turnover rate across similar businesses in its industry to get a sense of how well it’s retaining talent.

Let’s consider a restaurant. Personnel managers face challenges including employing many first-time, part-time, seasonal and student workers. Additionally, upward mobility for restaurant employees often occurs by taking positions at a new location. Yet even restaurants can develop solid “people plans” to lower turnover rates and improve team morale and cohesion, all of which lead to a better experience for guests.

Generally speaking, high turnover rates signal problems—with the company’s recruiting, its culture, its compensation and benefits structure, individual managers, training and career progression paths, and more.

What Are the Top Reasons for High or Low Employee Turnover?

Most studies of the causes of high voluntary turnover agree that more money and time off, better benefits, a promotion and the prospect of a more supportive boss are the Top 5 reasons good employees decamp to new positions.

That reality shows that most turnover is preventable if a company is willing to spend on overall compensation, open up career paths, focus on flexibility and be on the lookout for ineffective managers—and take decisive action when they see higher than average attrition from one department.

What drives intense employee loyalty? Online retailer Zappos is often cited as a case study of how to retain workers. The company issues a “Zappos Culture Book” that illustrates how it regularly achieves an 85% or better retention rate. It boils down to a culture that embraces creativity and cares about its employees’ happiness.

Closing the loop, items that make employees happy: Good compensation and benefits and a positive culture, which is largely driven by direct managers.

Types of Employee Turnover

Turnover accounts for all separations, both people who leave the company on their own accord and those who are terminated or part of a reduction in force or round of layoffs. It also includes separations due to retirement, death and disability. Turnover is different from attrition in that it accounts for all departures from the company, where attrition considers only voluntary turnover.

Is employee turnover good or bad? It depends on the type.

Voluntary Turnover vs. Involuntary Turnover

Voluntary turnover counts employees who left the company by choice, often to take a new job at a different company, pursue educational opportunities, for personal reasons or to retire. Involuntary turnover is the termination of employees who are terminated for failing to meet performance standards and job expectations, have committed misconduct, are part of a seasonal layoff as well as employees who are part of a company-wide layoff.

A recently released study by analyst firm Mercer pegged average U.S. annual turnover at about 20%, with about two-thirds of that voluntary.

Desirable vs. Undesirable Turnover

Those who are terminated from their positions, not including unavoidable layoffs, fall into the category of desirable turnover because newer, more diligent and skilled employees can replace them. When it comes to voluntary turnover, the loss of people who left the company for new roles, not those who retired, is considered undesirable.

Cost of Turnover

The cost of replacing employees is a significant driver in business’s initiatives to reduce both involuntary and voluntary turnover. Gallup estimates that the cost of replacing an employee is somewhere between one-half and two times the worker’s salary.

Doing the math, losing an employee with a salary of $80,000 a year can cost the organization as much as $160,000. A 100-person company that pays an average salary of $50,000 and experiences 20% turnover could spend $2 million per year replacing 20 workers at the cost of $100,000 each.

Turnover that is a result of hiring the wrong person and then being forced to quickly find a replacement is costly both financially and in lost productivity, morale and compromised quality of work.

Turnover by Industry

All this begs the question: What is a reasonable level of attrition?

Turnover, like most benchmarks, must be viewed in terms of industry. What’s high for one vertical industry may be completely typical for another. Retail and wholesale have the highest annual voluntary turnover rates at 37%, per the Mercer study, where the national average is 20%. Mercer says the job functions with the highest annual voluntary turnover are contact center/customer service (17%), manufacturing and operations (15%), and sales (14%).

Industries often calculate their turnover monthly; HR teams should look to industry sources and analysts for trends in their verticals. The U.S. Department of Labor also tracks job opening and turnover data on an ongoing basis.

How to Calculate Employee Turnover

Calculating your turnover rate may seem straightforward, but there are a number of components that can skew results. Companies with human capital management (HCM) specialists should get those experts involved in analyzing attrition rates and causes. Others can access insights from analysts, including the Society for Human Resources Management (SHRM).

SHRM advises calculating employee turnover rate by dividing the number of separations during a month by the average number of employees on the payroll, multiplied by 100. Thus, to figure your employee turnover rate, you need to calculate:

Total headcount: This includes all employees on payroll and direct-hire temp workers, as well as those on a temporary layoff, leave of absence or furlough. It should not include temporary workers or independent contractors on a separate agency’s payroll.

Average number of employees: From there, calculate the average number of employees per month by taking each month’s total and dividing by the number of months or the total headcount from each report if run more than once a month/number of reports used.

Total separations: The number of separations during a month includes both voluntary and involuntary terminations, but employees who are temporarily laid off, on furloughs or on a leave of absence are not included.

That yields this formula:

Turnover Rate = # of Separations / Avg. # of Employees × 100

To calculate annual turnover rate (TR) or year-to-date turnover rate (YTD), add the monthly turnover rates together.

YTD Turnover Rate = January TR + February TR + March TR

Alternative ways to calculate employee turnover

Another, less detailed way to calculate turnover rate is to take the number of employees who left during a specific period and divide by the number of employees at the beginning of the period.

There are also ways to calculate different dimensions of turnover, for instance:

Involuntary turnover = (Number of Involuntary Employee Separations / Average Number of Total Employees) × 100

Voluntary turnover = (Number of Voluntary Employee Separations / Average Number of Total Employees) × 100

How does the Bureau of Labor Statistics calculate turnover?

The Bureau of Labor Statistics releases a “Job Openings and Labor Turnover” (JOLTs) report each month that classifies data by job openings, hires and separations. Total separations include quits, layoffs, discharges and retirements, deaths, disabilities, and separations due to transfers to other locations of the same firm.

The quit rate serves as a measure of workers’ willingness or ability to leave jobs. For instance, the quit rate for September 2020 was 2.1%. The sample size is approximately 8 million establishments on the Bureau of Labor Statistics' ES-202 Quarterly Census of Employment and Wages file.

What Is a Healthy Employee Turnover Rate?

As discussed, turnover rates vary widely by industry and must be viewed within that context. HR teams can peg the national annual turnover average somewhere around 20%, with the monthly average at 3.2%. From there, they need to plug in data from their human resources management systems, which ideally will be integrated with financial systems and thus able to provide insights into salaries and associated hard workforce costs.

Tracking overall turnover rates can help companies see if turnover is reaching levels that are problematic and allows them to dig into specifics. Are turnover rates consistent by age, gender, ethnicity and tenure? How about by role, location, department and manager? Is the workforce management team in the loop on trends that could indicate shortages in key roles?

Employee Turnover Prevention

Here’s the good news: Excess turnover is a fixable problem. And the solution, often, starts with departmental managers.

Here are some best practices for HR teams.

Codify requirements for people managers: Don’t leave it to chance that front-line supervisors are checking in with their reports regularly or that they are discussing the factors that cause people to leave—including compensation, career path and better work-life balance. Remember: What’s important to one high performer may not matter to another. It is absolutely crucial that managers uncover individual motivations and understand what will cause a person to not only continue to perform, but become deeply engaged with executing the company’s vision.

Be proactive about communicating openings within the company: When it comes to career development, people who leave are often looking for paths to grow and develop new skills that they believe are unavailable within the company. By publicizing opportunities to move to new roles—and making sure there are no adverse effects for applying—HR can both minimize recruitment costs and aid with retention.

Analyze attrition data in detail: If one department is losing people at a higher rate than other groups, delve into why. It could be the nature of the roles within that team, or it could be that leaving employees want better communication and support from their managers, who they expect to treat them with professionalism.

Communicate, communicate, communicate: By increasing communication with employees via town halls and surveys HR can highlight company vision as well as practical but important items like employee recognition programs, professional development opportunities and new benefits.

Improve Tracking and Employee Turnover Reduction With HR Software

Full-featured human capital management software plays a crucial role in reducing employee turnover for several reasons.

First, it makes it much easier for HR to collect and analyze data and track KPIs that help reduce attrition—including turnover metrics themselves. HCM software makes it very easy for HRIS analysts to give leaders and managers answers instead of spreadsheets full of numbers and leaving them to their own devices for analysis.

When selecting workforce management tools, look for solutions that:

Allow organizations to spot problems with absenteeism and put in place the more flexible and predictable scheduling employees demand.

Raise alerts at defined triggers. Interestingly, studies show that the one year-mark is a crucial point. Employees may buy in to the thought that they should stay in a role for at least a year lest they be seen as “job hoppers.” Something as simple as automating an alert to a manager on an employee’s one-year anniversary—as well as the human resources department—can provide a reminder to check in.

Links performance metrics with stated goals—for instance, sales targets in the CRM system, so that achievement can be recognized in real time. And with succession planning tools, the organization is able to visualize bench strength and prepare high performers to take on key roles with training opportunities and clearly defined career paths.

Make transactional parts of the employee’s job easy and accurate—simple factors like getting paid correctly and on time, tracking accurate vacation accruals, seamless onboarding, ensuring ease of benefits enrollment and getting answers from HR when they need them are important to the employee experience.

Software improves the experiences that are at the root of high employee engagement, which correlates with lower turnover rates.

Employee Turnover FAQ

Who is responsible for employee turnover?

While many factors converge to cause an employee to leave a job voluntarily or involuntarily, the former is most closely associated with the manager. Poor managers are a major reason employees leave—and good managers help design work environments that encourage people to stay. HR is responsible for tracking employee turnover and providing insight on trends, but in terms of people within the organization, a manager has the most power to prevent voluntary turnover.

Why should I care about employee retention?

Employee turnover can cost organizations millions every year. Turnover rates outside industry norms can signal major problems with culture, managers, compensation and benefits, and negatively impact customers.

What is the ROI of retention?

Besides avoiding the costs of replacing employees and the potential for lost sales, companies should realize that every facet of life is now subject to very public ratings. Just as a poor Yelp review can directly reduce a restaurant’s revenue, when employees slam your company on social media or career sites like Glassdoor, you will need to spend more to attract top talent.