Labour turnover refers to the establishment of a relationship between the number of employees leaving during a period of time to the average number of employees during that period. It may also denote the percentage change in the labour force of an organisation.
A higher percentage of labour turnover will mean that employees are not stable and new employees join while old employees leave the organisation. A lower labour turnover, on the other hand, means that only small number of employees have come in and gone out of the organisation.
The extent of labour turnover can be judged with the help of following formulas:
(a) Separation Rate Method:
Labour Turnover = No. of workers separated during the period/Average number of workers during the period x 100. In this method the number of persons separating from the organisation in a particular period is counted and this figure is divided by the average number of workers in that period to find out labour turnover rate.
(b) Replacement Rate Method:
In this method the number of workers replaced, and not separated is taken into account. For example, if 100 workers have left the organisation in a particular period but 80 persons have joined on their place, the figure of 80 will be used for calculating labour turnover rate.
Labour Turnover = No. of persons replaced during the period/Average number of persons during the period x 100
(c) Labour Flux Rate Method:
Flux Rate Method takes into account both the separations and their replacements. The number of persons who have left the organisation and those who have joined their place are totalled for calculating labour turnover.
Labour Turnover = No. of workers separated during the period + No. of workers replaced during the period/Average number of persons during the period x 100
Any of these three formulas may be used for calculating labour turnover rate. Once this percentage is calculated with the help of a specific method, the same should be used again for finding out comparable position. Every organisation should try to keep labour turnover to the minimum because workers are an asset and they should be retained for as much period as possible.
Causes of Labour Turnover:
The various causes of labour turnover can be classified under the following three heads:
- Personal causes;
- Unavoidable causes; and
- Avoidable causes.
1. Personal Causes:
Workers may leave the organisation purely on personal grounds, e.g.
- Domestic troubles and family responsibilities.
- Retirement due to old age.
- Accident making workers permanently incapable of doing work.
- Women workers may leave after marriage in order to take up household duties.
- Dislike for the job or place.
- Workers finding better jobs at some other places.
- Workers may leave just because of their roving nature.
- Cases involving moral turpitude.
In all such cases, labour turnover is unavoidable and the employer can practically do nothing to reduce the labour turnover.
2. Unavoidable Causes:
In certain circumstances it becomes necessary for the management to ask some of the workers to leave the organisation.
These circumstances may be as follows:
- Workers may be discharged due to insubordination or inefficiency.
- Workers may be discharged due to continued or long absence.
- Workers may be retrenched due to shortage of work.
3. Avoidable Causes:
(a) Low wages and allowances may induce workers to leave the factory and join other factories where higher wages and allowances are paid.
(b) Unsatisfactory working conditions e.g., bad environment, inadequate ventilation etc. leading to strained relations with the employer.
(c) Job dissatisfaction on account of wrong placement of workers may become a cause of leaving the organisation.
(d) Lack of accommodation, medical, transport and recreational facilities.
(e) Long hours of work.
(f) Lack of promotion opportunities.
(g) Unfair methods of promotion.
(h) Lack of security of employment.
(i) Lack of proper training facilities.
(J) Unsympathetic attitude of the management may force the workers to leave.
Effects of Labour Turnover:
There must be some labour turnover due to personal and unavoidable causes. It has been observed by employers that a normal labour turnover, which is between 3% and 5%, need not cause much anxiety. But a high labour turnover is always detrimental to the organisation. The effect of excessive labour turnover is low labour productivity and increased cost of production.
This is due to the following reasons:
- Frequent changes in the labour force give rise to interruption in the continuous flow of production with result that overall production is reduced.
- New workers take time to become efficient. Hence lower efficiency of new workers increases the cost of production.
- Selection and training costs of new workers recruited to replace the workers who have left increase the cost of production.
- New workers being unfamiliar with the work give more scrap, rejects and defective work which increase the cost of production.
- New workers being inexperienced workers cause more depreciation of tools and machinery. Due to faulty handling of new workers, breakdown of tools and machinery may also occur very often and hamper production.
- New workers being inexperienced workers are more prone to accidents. Consequently, all costs associated with accidents such as loss on account of output lost, compensation for the injured workers, damage of materials and equipment due to accidents etc. increase the cost of production.
Reduction of Labour Turnover:
As already pointed out, normal labour turnover is advantageous because it allows injection of fresh blood into the firm. But excessive labour turnover is not desirable because it shows that labour force is not contended. Therefore, every effort should be made to remove the avoidable causes which give rise to excessive labour turnover.
Following steps may be taken to reduce the labour turnover:
- A suitable personnel policy should be framed for employing the right man for the right job and giving a fair and equal treatment to all workers.
- Good working conditions which may be conducive to health and efficiency should be provided.
- Fair rates of pay and allowances and other monetary benefits should be introduced.
- Maximum non-monetary benefits (i.e., fringe benefits) should be introduced.
- Distinction should be made between efficient and inefficient workers by introducing incentive plans whereby efficient workers may be rewarded more as compared to inefficient workers.
- An employee suggestion box scheme should be introduced whereby workers who suggest improvements in the method of production should be suitably rewarded.
- Men-management relationships should be improved by encouraging labour participation in management.
In addition to the above steps, the personnel department should prepare periodical reports on the labour turnover listing out the various reasons due to which workers have left the organisation. The report should be sent to the management with the necessary recommendations so that corrective measures may be taken to reduce labour turnover.
Cost of Labour Turnover:
The cost of labour turnover can be divided under two heads:
(i) Preventive Costs.
(ii) Replacement Costs.
(i) Preventive Costs:
These are costs which are incurred to prevent excessive labour turnover. The aim of these costs is to keep the workers satisfied so that they may not leave the factory.
These costs may include:
- Cost of providing good working conditions.
- Cost of providing medical, housing and recreational facilities to workers.
- Cost of providing educational facilities to the children of the workers.
- Cost of providing subsidised meals.
- Cost of providing other welfare facilities.
- Cost of providing safety measures against working conditions.
- Measures of security and retirement benefits such as pension, gratuity, employer’s contribution to provident fund and other measures over and above the compulsory legal provisions.
As “prevention is better than cure” preventive cost should be incurred to prevent excessive labour turnover. This cost of labour turnover should be apportioned among different departments on the basis of average number of employees in each department and justifiably treated as overhand.
If preventive cost is incurred for reasons of image or status of the employer or non-economical corporate goals, it may be debited to the Costing Profit and Loss Account. If preventive cost is incurred for a particular department, it may be taken as overhead of that department.
(ii) Replacement Costs:
These costs are associated with replacement of workers and include:
- Cost of recruitment of new workers.
- Cost of training new workers.
- Loss of production due to
(a) Interruption in production, and
(b) Inefficiency of new workers.
- Loss of profit due to loss of production.
- Loss in fixed overhead cost because of less production on account of new inexperienced workers.
- Wastage due to excessive spoilage on account of inept handling of machines, tools and materials by new workers recruited as a result of labour turnover.
- Cost of accidents because of new workers having more proneness to accidents.
These costs should be distributed among different departments on the basis of actual number of workers replaced in each department and treated as overhead.
In addition to direct labor costs, there are other costs associated with direct labor workers. These are idle time, overtime premium and fringe benefits that are provided to workers. These are not part of direct labor cost. The following paragraphs explain the computation and accounting treatment of idle time, overtime premium and labor fringe benefits:
Treatment of idle time:
Idle time means the amount of time the workers remain idle in a normal working day. The idle time is usually caused by a sudden fault in machine or equipment, power failure, lack of orders for the product, inefficient work scheduling, defective materials and shortage of raw materials etc. The cost associated with idle time is treated as indirect labor cost and should, therefore, be included in manufacturing overhead cost. For example, the normal weekly working hours of a worker are 48 and he is paid @ $8 per hour. If he remains idle for 6 hours due to power failure, then the cost of 42 hours would be treated as direct labor cost and the cost of 6 hours (idle time) would be treated as indirect labor cost and included in manufacturing overhead cost.
Treatment of overtime premium:
Overtime premium is the amount that is paid, for the overtime worked, in excess of the normal wage rate. Like idle time, overtime premium is also treated as indirect labor cost and included in manufacturing overhead cost. For example, a worker normally works for 48 hours per week @ $8 per hour. In a particular week, if he works for 52 hours and company pays him $12 for every hour worked in excess of 48 hours, the allocation of the labor cost of the worker would be made as follows:
The amount of $16 is overtime premium and is a part of manufacturing overhead cost.
Treatment of labor fringe benefits:
Fringe benefits are benefits that employers provide to employees in addition to normal salaries or wages. Examples of fringe benefits are hospitalization, insurance programs, retirement plans, paid holidays and stock options etc. Most of the companies treat labor fringe benefits as indirect labor and, therefore, include them in manufacturing overhead costs.
A few firms treat direct labor related fringe benefits as addition to direct labor cost which is considered a more superior practice.
The above information has been summarized below: