The coronavirus crisis has officially reversed America’s ten-year trend of record low unemployment and unfettered economic expansion. In the second half of March, nearly ten million Americans filed for unemployment benefits. In response, the IRS is now offering the Employee Retention Tax Credit to firms that keep their workers. For the long-term benefit of the American workforce, a tax policy similar to the Employee Retention Tax Credit ought to be made permanent.

Short-Term Benefits

The Internal Revenue Service’s Employee Retention Tax Credit offers employers a tax break equivalent to “50% of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by COVID-19.” This tax credit is available to large and small businesses alike so that firms retain their workers in spite of forced shutdowns.

Along with low-interest loans, payroll tax breaks, and cash distributions, the Employee Retention Tax Credit is a fiscal policy tool for minimizing unemployment, increasing discretionary spending, and preventing business foreclosures.

Undoubtedly, this IRS policy will immediately benefit thousands of workers—especially those working in hospitality, tourism, food service, supply chain, and other hard-hit industries—and prevent additional mass layoffs. However, employee turnover is a problem that merits a permanent solution, even in periods of economic prosperity.

Long-Term Payoff

Employee turnover is a persistent problem in the United States labor market. In sectors like grocery, retail, fast food, hospitality, and logistics, annual employee churn can reach heights of 300%. In other words, employers are replacing the equivalent of their entire workforce up to three times per year. This problem is expensive; various studies place the cost of replacing a single hourly employee between $4,000 and $7,000.

Gallup found that 78% of employee exits have nothing to do with wages. Most employees leave due to avoidable factors, including disagreement with management, lack of opportunity for career advancement, and low engagement.

In many industries, firms consider employee turnover a perpetual cost of doing business. However, a permanent tax credit for high employee retention could shock the market into addressing the persistent turnover problem—and, therefore, improving conditions for millions of employees. A long-term implementation of a policy similar to the Employee Retention Tax Credit would promote investment into American workers. 

Gallup consistently analyzes the firms with the lowest employee turnover in the United States. In one study, Gallup reports twice as much employee retention for companies that strategically invest in employee development. In another, Gallup finds 70% fewer safety accidents among business units in the top quartile of their employee engagement database.

Pointing American businesses toward policies that boost employee retention—increasing engagement, promoting on-the-job training—will inevitably lead to a more motivated, productive, and versatile American workforce. Therefore, the federal and state governments ought to establish tax incentives that encourage policies leading to lower churn.

Learn more about Qlicket and our experience on the front lines of decreasing employee turnover.