Dividends from Employment Background Checks
by Chris Alldredge
ProfitabilityGreater profitability is a goal of both business principles and managers seeking to maximize shareholder value. Providing better information for better hiring decisions is how A Matter of Fact helps to improve your bottom line by avoiding the costs of a bad hire. According to a survey conducted by Right Management, a management consulting company, the average cost of a bad hire is 2.5 times the employee’s salary, while some 40% of survey respondents indicated they estimated the cost of a bad hire to be 3 times the employee’s salary. See Right Management Survey.
These costs may be organized into three categories: Turnover costs, Theft and Dishonesty Losses, and Employee Misconduct (sexual harassment suits, negligent hiring/retention suits, workplace violence, etc.).
Turnover CostsThe cost of employee turnover places heavy demands on an organization's resources. According to an article written by John Dooney for SHRM (Society for Human Resource Management), turnover costs may be categorized into four types: Separation Processing Costs (e.g. exit interviews and administrative overhead), Replacement Hiring Costs (e.g. recruiting and interviewing replacements), Training Costs, and Lost Productivity (e.g. performance differential as a new hire gets up to speed etc.). See Cost of Turnover (membership login required).
Consider the following average Cost of Turnover estimates.
- 150% of annual compensation for salaried workers. See ROI of Background Screening.
- 12% of pre-tax income for the average company. See Improving Retention.
Theft and Dishonesty LossesEmployee theft and dishonesty losses also certainly have an adverse effect on the bottom line of any employer. The ACFE (Association of Certified Fraud Examiners) estimates the typical US organization loses 7% of annual revenue to employee theft and fraud. According to the report, "If this percentage were applied to the estimated 2008 US gross domestic product of $14.196 trillion, we could project that roughly $994 billion would be lost to fraud in 2008." (Occupational Fraud and Abuse, ACFE 2008 Report to the Nation.)
Employee MisconductWorkplace violence, drug and alcohol abuse, and sexual harassment represent costs in and of themselves, but also may be grounds for negligent hiring liability. First let us consider these sobering numbers.
- Workplace violence costs $120 billion annually. (Whitehead, Shelly. "Killing at Jobs Sites Soaring" Cincinnati Post 11/12/2004)
- Drug and alcohol abuse costs $81 billion annually. See Drugs in the Workplace.
- The average sexual harassment settlements are $250,000. See Avoid Sexual Harassment Lawsuits.
According to an article published by SHRM, Negligent Hiring is "the failure of the employer to investigate a job applicant's work experience, character, criminal history and other relevant data prior to the hiring of an employee." See Workplace Violence: Trend and Strategic Tools for Mitigating Risk.
Negligent Hiring lawsuits may follow in the aftermath of incidents of workplace violence, or workplace accidents caused by coworkers under the influence of controlled substances. According to a California survey, employers lose 60% of negligent hiring cases at trial. The average award given was $3 million, while the average cost to settle out of court was $500,000 plus attorney fees. (NAPBS Webinar.)
How Can Background Checks Help?Good information allows an employer to determine if the applicant is appropriate for the job and the work environment. It provides the prospective employer important information as to whether a potential employee has been involved in criminal activity, or whether the potential employee has the experience, education, or training needed to succeed in the job.
Backgrounding as part of the hiring process allows employers to screen out potential problem employees and screen in the appropriate attitudes and skills. If it is clear to the applicant pool that the prospective employer conducts background checks, fewer applicants with spotty pasts or something to hide will apply. Making better hiring decisions means hiring less often, saving wasted benefits, training and development costs. Organizations may also decrease insurance costs, as some insurance companies offer discounts to firms who background and drug screen their employees and applicants (see Criminal Background Checks: A Checklist of the Pros and Cons).
Past patterns of behavior serve as our best predictor of future performance and conduct. Background Checks reveal past dishonesty and crimes an applicant would be loath to disclose. Screening out these individuals will help employers avoid losses due to theft, fraud, and legal troubles.
Because of the large number of candidates who make false claims, Criminal Record Checks, Prior Employment Verifications, Education Verification, License Verifications and other research tools can reveal potential problem areas and help protect employers against negligent hiring claims, thus positively impacting the organization’s profitability.
Putting it All TogetherThe expense of implementing an employment background screening program is a wise investment to mitigate the risks associated with turnover, employee theft and fraud, employee misconduct and resultant liability. Note these statistics cited by the Phoenix Business Journal from the US Small Business Administration, "for every dollar an employer invests in employment screening, the return on investment rages from $5 to $16, resulting from improved productivity, safer working environments, reduced absenteeism, lower turnover, lower insurance premiums and decreased employer liability."
- For information on how background checks help reduce employee dishonesty, click Reduce Employee Dishonesty Losses.
- For a discussion of the trade-off between cost and risk in criminal searches, see Criminal Checks: Cost Versus Risk.
- For recommendations on what searches ought to be run in an effective background check, see Comprehensive Background Checks
- For a step-by-step process on how to conduct employment background checks , visit How to Conduct a Background Check: A Step-by-Step Guide.
- Knowledge Index: Pros & Cons of Background Checks
About the AuthorAbout the Author Chris Alldredge is a researcher for A Matter of Fact, a California-based employment background check firm. www.amof.info