Flexibility and temporary worker turnover: How much does it cost companies?

Numerical flexibility refers to the capacity to gauge the number of workers to market conditions and production needs; this is one of the aims that today’s companies strive to achieve and implement in their workforce. To do so, they generally resort to hiring to temporary workers. In other words, companies recruit workers offering an employment contract with a limited duration and a pre-determined expiration date. This is the case with seasonal workers, for instance, who are needed during peaks in production or demand.

Companies that see major swings in demand and in production cycles are the ones which most often rely on temporary workers; examples are the tourism, food and agriculture. The possibility for planning worker turnover ex ante represents a clear advantage for these organizations. When an employee’s temporary contract expires, the manager can decide to cut down on the number of workers, or renew the contract, or hire someone else as a replacement. It comes as no surprise that the higher the cost of hiring and firing workers, the more common temporary employment contracts.

For permanent workers (with long-term employment contracts) by now it has been widely demonstrated that turnover gives rise to problems and organizational inefficiencies, destabilizing work activities, causing slowdowns and depleting knowhow, skills and abilities. But with temporary workers, the common conviction has always been that the costs of turnover, if any, were minimal, in particular when weighed against the advantages arising from numerical flexibility. According to this line of reasoning, temporary workers, in particular those who perform low-skill tasks, are not high-value resources for the company. Consequently, when they leave, the loss in human capital is negligible.

But what if temporary workers were not easily replaceable, plug-in resources, with no specific capital? What if instead they developed human capital that is similar in every way to other workers? What would the turnover of these temporary workers cost companies?

To answer this question, we conducted a study son a leading multinational in the food and beverage industry, based on longitudinal data provided by the organization’s Italian business units (bars and restaurants).

According to the strategic corporate guidelines of this company, temporary workers are employed to handle fluctuations in demand. However, restaurant managers are granted ample leeway in deciding the number of workers to hire, the length of their contracts, and the tasks they are assigned.

Our first objective was to verify whether the turnover of temporary workers actually incurred no costs, or if instead beyond a certain point this “churn” generated more disadvantages than advantages. To do so we tested the hypothesis that there is an inverted U-shaped relationship between temporary worker turnover and business unit performance. This would mean that low or moderate levels of planned turnover have a positive impact on performance, allowing the organization to cut personnel costs and eliminate excess resources. But beyond the optimal churn level, the costs in terms of disruption for the remaining workers outweigh the benefits of numerical flexibility.

It is not unusual to find temporary and permanent employees working side by side, performing similar tasks which are highly interdependent. In fact, all the interviewees in our study reported that the level of interaction between the two categories of workers was very intense, and that tasks were assigned by store managers depending on the needs of the moment, regardless of contract type. Elevated interchangeability means that when one or more temporary worker leaves the organization, the workload must necessarily be redistributed among the rest of the staff. But is not the only drawback. Beyond having to modify their routines to offset the departure of their former co-workers, the employees that remain find themselves having to spend some of their time training new hires. The main outcome of this is the disruption of rhythm and efficiency among the workers, with tangible ripple effects on the performance of the entire unit.

Consequently, the higher the number of incoming new hires called in to replace outgoing workers, the more evident the drop in performance (our second hypothesis). In addition, this effect is more accentuated when replacements have no prior firm-specific experience, as compared to rehires who have already trained and worked in the organization (third hypothesis).

The presence of temporary employees can have a negative impact on the unit in which they work. Beyond a destabilizing effect, these workers can escalate conflicts and exacerbate the attitudes and behaviors of permanent staff. But there is another cost that our study clearly reveals linked to the hiring of temporary workers, a cost that managers must be aware of: when temporary workers leave the organization, performance suffers, in particular when turnover is high.

We did not find evidence corroborating the idea that temporary workers are disposable resources that perform “plug-in” jobs without developing any specific human capital. On the contrary, their departure from the company results in a depletion of the collective skill set that must be replaced, with considerable consequences on other workers and the entire unit in terms of efficiency and performance. Therefore, managers should always consider other combinations of employment relationships, making an accurate estimate of the costs associated with each contract type while avoiding replacing large numbers of outgoing workers with completely inexperienced new recruits.