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CIPD release new formula to calculate redundancy costs

CIPD release new formula to calculate redundancy costs

The UK's Chartered Institute of Personnel and Development (CIPD) has estimated that the average direct cost to employers of making redundancies can reach £16,375 ($34,991) per employee,…

The UK's Chartered Institute of Personnel and Development (CIPD) has estimated that the average direct cost to employers of making redundancies can reach £16,375 ($34,991) per employee, even before hidden costs like higher labour turnover and a fall in staff productivity are added in.

"This is likely to be a conservative estimate and provides a hard business case for why redundancies should be a last resort in the downturn," said John Philpott, chief economist for the CIPD.

"We urge employers to plan for recovery by investing in and growing their people, rather than reducing their workforce."

The CIPD created a new formula to help employers realise the genuine cost of redundancy on their business, which is: real cost of redundancy = (n ×R) + (x ×H) + (x ×T) + ny(H + T) + Wz(P - n), where: n = number of people made redundant; R = redundancy payments; x = number of people subsequently hired; H = hiring costs; T = induction/training cost; y = percentage quitting post redundancy; W= average monthly staff salary; z = percentage reduction in output per worker caused by lower morale; and P = number of people employed prior to redundancies.

"The formula shows how redundancies can impede quick recovery from the downturn," Philpott said.

"This doesn't mean that restructuring can't take place but it should be with a view to the long term and not short term cost cutting."

- Craig Donaldson

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