What counts as a bad hire?
Obviously, an easy tell is when an employee lacks the necessary skills or qualifications for their role, leading to subpar performance and increased supervision. According to a CareerBuilder survey, 49% of bad hires lied about their actual skill sets during the hiring process. Similarly, negative attitudes or a lack of motivation in employees can spread discontent among colleagues, further hindering productivity. 62% of employers said they identify dishonesty as a significant turn-off in candidates.
Recognising these traits early in the hiring process is essential to prevent the hidden costs associated with bad hires. Thus, strive to devise more in-depth practical tests to avoid falling for fake claims.
So what are the seven hidden costs of bad hires?
1. Wasted recruitment spend
A bad hire can significantly strain your company's finances, with recruitment expenses being especially hard-hitting. Engaging recruitment agencies often incur fees ranging from 15% to 30% of the new employee's annual salary, translating to £6,000 to £12,000 for a position offering £40,000. Additionally, advertising the vacancy can add approximately £370 per employee.
Plus, managers and HR personnel invest considerable time crafting job descriptions, sifting through applications, and conducting interviews. For instance, handling 75 CVs at an average of five minutes each amounts to over six hours of work. When combined with conducting multiple interviews, the cumulative time can result in high internal recruitment costs – especially if the duration of the hiring process is prolonged.
Whilst the duration varies based on the role being hired for, it is not uncommon for the hiring process to last over a month or even between 9 to 12 weeks. On top of that, the time taken to fill a vacancy can impact overall productivity of a team and lead to potential losses in output or necessitate overtime from existing staff to cover the work. This can cause delays that not only affect immediate productivity but can also have long-term financial implications for the organisation.
2. Increased legal risk and tribunal claims
Hiring the wrong person can significantly increase your firm’s exposure to legal risks, particularly concerning unfair dismissal claims and the Employment Tribunal may become involved. In the UK, if an employee is terminated without a fair reason or proper procedure, they may file an unfair dismissal claim. Tribunal Statistics between 2023 and 2024 indicate that the average award (ie compensation ordered by the court for the successful party) for such claims was approximately £14,000, with maximum awards reaching up to £179,000.
Discrimination claims, especially those related to breaches of the Equality Act 2010, can be even more financially burdensome. For instance, the average award for age discrimination cases has surged by 624% to reach £103,000 in between 2022 and 2023, up from £14,000 the previous year. Such substantial awards underscore the importance of ensuring that hiring and employment practices are free from discriminatory biases.
To mitigate these risks, many employers opt for settlement agreements to resolve disputes before they escalate to tribunals. While this approach can be cost-effective, it still entails expenses. Employers typically contribute between £350 and £500 plus VAT toward the employee's legal fees for such agreements. However, if negotiations become complex, these costs can escalate rapidly.
3. Impact on team productivity and morale
Underperforming employees produce substandard work, forcing their colleagues to shoulder additional responsibilities to maintain quality standards. This increased workload can result in frustration and resentment among team members, damaging overall morale and efficiency.
At that point, managers are compelled to divert valuable time and resources to mitigate the ‘bad hires fallout’. Yet, this shift in focus from strategic objectives to remedial actions hampers the team's progress and can delay critical projects. In fact, 26% of managers often perceive underperforming employees as a significant negative factor, making their job even more difficult.
4. Client relationships and reputation damage
The very act of substituting an underperforming employee produces issues in and of itself. Granted, such a move is warranted following poor service delivery, but so are its consequences. In today’s interconnected world, news spreads fast, especially regarding companies that have a high employee turnover.
Clients may perceive frequent staff changes as a sign of instability, leading to diminished trust and potential loss of contracts. Maintaining a consistent and competent team is key to building lasting client relationships and ensuring long-term business success.
5. Training and onboarding investment lost
On average, UK businesses allocate approximately £1,530 per employee for training initiatives. This far-from-insignificant figure encompasses expenses related to induction programmes and skills development sessions. However, when an employee departs prematurely, these investments yield minimal returns and hurt your budget.
Making matters worse, many organisations invest in external courses or certifications to enhance their employees' competencies. These programmes often involve substantial fees, which, when coupled with the time employees spend away from their primary responsibilities, amplify the overall investment. Should the employee leave the firm shortly after completing such training, the organisation not only forfeits the direct costs but also the anticipated benefits of the enhanced skill set.
Research indicates that, as of December 2024, 23% of employees intend to quit their jobs in the short term and often leave their role within two to five years of onboarding. The result? Businesses losing out on thousands of pounds in the long run because they are having to replace and train staff at an increased rate. It is understandable why firms might start implementing policies requiring employees to repay training costs if they resign within a specified period after completing the training.
6. Payroll and benefit wastage
In the UK, employees are entitled to 5.6 weeks of paid holiday annually, during which they receive their regular pay. Additionally, if an employee becomes ill, employers are currently obligated to provide Statutory Sick Pay (SSP) of £118.75 per week for up to 28 weeks. If a bad hire frequently utilises (or abuses) these benefits, the organisation incurs costs without corresponding productivity.
Employers are required to contribute at least 3% of an employee's qualifying earnings to their workplace pension scheme. In addition, the employer National Insurance contribution rate has increased from 13.8% in 2024 to 15% in 2025, with the threshold lowered from £9,100 to £5,000 per year. These escalating costs cement the importance of meticulous hiring practices to ensure a positive return on investment.
7. Delays in business growth or project delivery
By definition, bad hires lack the necessary skills or motivation to meet project timelines, leading to delays that can derail strategic plans and diminish market competitiveness. Unfortunately, the process of rehiring to replace an unsuitable employee further slows organisational momentum. Time and resources must be reinvested into recruitment, onboarding, and training, diverting attention from core business activities. This cyclical disruption hampers team cohesion and delays project delivery, ultimately affecting the company's bottom line and growth trajectory.
Replacing an unsuitable employee earning £25,000 a year, can cost your business upwards of £30,600, factoring in recruitment expenses, lost productivity, and training. The process includes costs such as temporary workers, management time spent interviewing, and recruitment agency fees, while new employees typically take 12 months to reach full productivity. These costs of rehiring after an unsuitable employee leaves indicate how expensive rehiring can be, highlighting the need for careful hiring to avoid such financial setbacks.
How to avoid the hidden costs of a bad hire?
There are a few tactics that employers can implement to prevent them losing money due to unnecessary bad hire expenses.
Tighten your hiring process with legal contracts
Utilising well-crafted employment contracts are crucial for setting out the rights and responsibilities of both employers and employees. These legally binding agreements establish clear terms regarding job roles, remuneration, working hours, and conditions, thereby minimising potential misunderstandings. In the UK, while employment contracts can be verbal, providing written documentation ensures clarity and serves as a reference point in case of disputes.
To strengthen your hiring process, it's advisable to regularly review and update employment contracts to reflect current legal standards and organisational policies. Engaging legal professionals to draft or revise contracts can further safeguard your organisation against potential liabilities. If you require an employment contract tailored to your needs, use Rocket Lawyer’s bespoke legal drafting service.
Use employer of record to hire internationally
Expanding your team internationally brings with it a host of legal and administrative hurdles. Using an Employer of Record (ie an external company that acts as the legal employer of international employees on behalf of the hiring company) lets you hire workers abroad without setting up a local entity, while still maintaining legal compliance with an Employer of Record that understands local labour laws, tax rules, and statutory benefits. This reduces the chances of misclassification, fines, or contract disputes that can arise from unfamiliar regulatory frameworks.
An Employer of Record, such as Remote or Oyster HR (compare them here), also handles essential HR processes like payroll, contracts, and employee benefits, allowing you to focus on performance and integration rather than red tape. This level of support ensures that your employment practices stay compliant across borders, even in regions with complex or frequently changing labour laws.
Use probation periods effectively
Clearly defining the duration and expectations of the probation period in the employment contract provides a structured framework for assessing a new employee's suitability. Regular performance reviews during this time offer opportunities to address any issues promptly, ensuring that both the employer and employee have aligned expectations.
The Employment Rights Bill (currently making its way through Parliament) suggests extending the maximum length of probation periods to nine months. Therefore, employers must enforce probationary terms that are transparent and consistently applied, with clear criteria for successful completion. This approach not only safeguards against potential legal challenges but also supports the development of a competent and committed workforce.
Know when and how to dismiss safely
Navigating the complexities of employee dismissal requires a thorough understanding of legal obligations to mitigate potential risks. In the UK, dismissing an employee without proper justification and procedure can lead to claims of unfair dismissal. It's essential to have a valid reason for termination and to follow a fair process, including conducting investigations and providing opportunities for the employee to respond.
Recent legislative proposals, such as the Employment Rights Bill, aim to bolster protections for employees, including provisions on dismissal rights from the first day of employment. Employers should stay informed about these changes to ensure compliance and avoid potential liabilities. For more information on potential employment changes, you can Ask a lawyer.
Take advantage of employment law support
Leveraging employment law support is crucial for proactively addressing potential workplace issues and mitigating the risks associated with bad hires. Organisations can benefit from the free, impartial advice provided by the Advisory, Conciliation and Arbitration Service (Acas), which offers guidance on employment rights, best practices, and dispute resolution. Alternatively, you can consult with Rocket Lawyer’s Legal Pros or law firms specialising in employment law to obtain tailored advice and strategies to navigate complex legal knots, resulting in compliance and reducing the likelihood of costly disputes.
Staying informed about legislative changes is equally important. For instance, recent discussions around the Employment Rights Bill highlight the evolving nature of labour law and its potential impact on business operations. By regularly communicating with employment law support services and remaining on top of legal developments, you can develop a fair and compliant workplace, thereby minimising the hidden costs associated with bad hires.
Summary for employers
Bad hires can create a multitude of hidden costs that can severely impact a business's bottom line. From wasted recruitment spend and lost training investments to legal risks and damaged team morale, these hidden costs accumulate quickly and can undermine the long-term success of your organisation. However, with the right strategies in place, these pitfalls can be avoided or at least minimised, protecting both your finances and your company's reputation.
By implementing sound hiring practices, using legal compliance tools, and getting support from employment law professionals, you can avoid many of the risks associated with poor hiring decisions. Additionally, effectively managing probation periods and staying informed about legal developments can ensure you’re prepared to handle any challenges that arise. Taking proactive steps now will save your business time, money, and unnecessary headaches in the future.
