Risks incidental to staff termination

Exiting an employee is a very crucial process, as such it is important to understand the associated risks and embed controls proactively. This  article focuses on the other end of the employee life cycle; being the risks around the staff termination or exit process.

Risks incidental to staff termination

Some exits may not be as pleasant such as dismissals, as such there must be a clear exit processes in place, that are aligned with the Employment Act and best practices to avoid regulatory and legal breaches. The exit process must be communicated to staff members. Risk Managers and Auditors must support the organization in ensuring that controls around exit processes are effectively managed through continuous testing.  An exit process that is not effectively managed can result in financial losses which can emanate when a former employee sues the organization or business for unfair dismissal and it can also result in reputational damage where an employer is known for unfair labour practices. Below are some of the risks that can materialize due to an inadequate staff exit process;

1.Risk of revenue leakage:

Revenue can leak due to failure to terminate benefits for ex staff members. This means they continue to access discounts, pension, medical aid and other incentives which should otherwise only be enjoyed by current employees. These discounts are paid for by the employer, which then increases the staff cost to company. It is important for HR practitioners to double check that employment benefits are also terminated when a staff member exits the organization, and other stakeholders must also be notified such as medical aid.

2.Risk of Fraudulent activities:

An inadequate staff exit process can create an opportunity for fraud schemes such as ghost employees. This can happen when an employee has failed to serve notice or absconded, and the last working day is never captured or is captured incorrectly and therefore the employee remains "live" for elongated periods. This means a staff member can collude with the ex-employee, so they continue to earn a salary as a "ghost " employee. The cost to company will continue to increase especially since other benefits such as leave accrual and severance benefit would have been paid out. In addition, when internal stakeholders like IT team are not notified about ex-employees, they may fail to remove them timely from all systems and biometric accesses, enabling fraudulent activities to be perpetrated through accesses granted to ex-employees.

3.Reputational risk from Labour disputes:

Labour disputes can result in reputational risk for the organization especially when they are constantly being summoned to court over unfair dismissal claims. It is also costly to the company as some organizations may opt to settle out of court to avoid the court procedures. Labour disputes can arise from unfair dismissal claims due to failure to embed and adhere to the exit process. The termination process should be aligned to the company policy under all circumstances; whether the termination is voluntary, due to a disciplinary enquiry or health issues that effectively warrant the staff exit. It is imperative that the exit process is followed, and all correspondences must be documented at all stages to avoid unfair dismissal claims.

4.Risk of Confidential information leakage:

Confidential information and other information based intangible assets can leak when an employee leaves the organization. In most cases, employees sign a non-disclosure agreement however, as a control it is not always possible to ensure it is not breached. When an employee exits the organisation, it is advisable to place them on garden leave if they have direct access to confidential information and trade secrets, while also noting the operational impact of their absence. The organisation can also block usage of personal emails and external drives to try and manage transfer of files. Although legal action can be taken against the employee it is better to prevent information leakage than to remedy the situation after the risk materializes.
5. Risk of Inadequate communication on staff exits:

Failure by the organization to inform staff members and other stakeholders of key personnel's exits can create room for speculation and loss of morale, and sometimes loss of business as well. This usually leads to poor handover and it may hinder a smooth transition. Organisations may try to conceal the exit of key personnel or executives, which can overall affect the perception of employees or external stakeholders on the state of affairs of the company. An open communication must be in place regarding staff exists.

Having unpacked some of the risks that are incidental to staff termination or exit, HR Managers and business owners must therefore ensure that there are checks in place when a staff member is exited. They must validate the reports to confirm that staff terminations are indeed effected and the ex-employee removed from the payroll system and other internal systems.  A termination checklist must be put into place to ensure that all relevant stakeholders have been engaged and the employee has returned the uniform, company access cards and other company property if applicable.  

Contribution by: MyHRBP



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