7 grave consequences of underpaying employees

It’s very easy for companies to offer minimum to low wages and salaries for employees – especially if the applicants are new to the corporate world. However, not every employee will comply and accept the payment being offered. When that happens, there will be consequences that could affect the business and the workforce.

Below, we will discuss seven negative effects of offering low-wage pay on the company.

Is underpaying employees a thing?

Unfortunately, underpaying employees is a common thing seen in any country, any industry, and any job position. Sometimes, it happens due to the employer being unaware of the current average salary being offered to employees with a particular set of skills and experience for a specific job role. Employers should have an understanding of what constitutes fair pay for the position and the job responsibilities they are assigned to do.

Underpayment also happens when the employer owes unpaid wages. Usually, employees are not paid for the work they do off the clock and can be considered as unpaid wages depending on the employment law that covers them. Usually, work done outside the shift schedule is not recorded by either the employer or employee due to negligence as well as a lack of initiative and accountability to record the time and work done.

Underpayment is also seen during termination of employment. On rare occasions, employers would miscalculate the final payment due to exiting employees. When that happens, the exiting employee could file a complaint against the company if they are within legal grounds.

Read more: Individuals can be pursued for underpayment claims, court rules

Grave consequences of underpaying employees

Listed below are some of the grave consequences companies have to face when underpaying employees:

1. High employee turnover

It is not a mystery that employees leave companies searching for a new role with better pay and employee benefits. Salary and compensation play a significant role in keeping employees motivated and loyal. According to a study conducted by Flexjobs, 59% of the 2,202 employees surveyed claim low salary is the main factor they quit their job. When employees discover they are underpaid, they will most likely move to a different company that is willing to offer more pay that could help fund their lifestyles and expenses – even if they enjoy their current responsibilities in their underpaid role.

Employers should always keep themselves updated with the current industry trends, especially when it comes to role responsibilities, their standings in the industry, and the minimum wage laws that govern specific job roles. This way, companies can offer competitive and fair employment packages to their employees – making employees happy and satisfied with their role.

2. Poor company culture

Since there is a trend of high turnover rates in companies that underpay their employees, the organization’s company culture is negatively affected. Because of the large number of employees that come and go within the workforce, there are not enough consistent efforts and interaction between employees to form a pattern of company culture. The employees who remain with the company lose interest in building connections with the new hires – making the newbies feel unwelcomed and isolated, which could significantly affect their morale.

3. Poor brand reputation

A company’s reputation plays a significant role in the success of the business. It builds the trust and loyalty of customers and employees alike. News of a company underpaying its employees can travel fast, making recruitment difficult as job seekers disregard the company’s job vacancies for companies with better employer reputations. In terms of customer service, having a poor brand reputation can make a customer lose faith in the company, its products, and its services.

Kyle Scott, director at Australian Business Lawyers & Advisors, told HRD that the underpayment of employees can also affect the internal reputation of a business and could damage the trust, engagement, and culture within workplaces.

4. Low morale

With the combination of high employee turnover and lack of company culture, employees quickly lose morale and motivation to do their work to the best of their abilities. They lose the focus to finish their tasks and projects while also losing the drive to challenge themselves to be better in their line of work. Employees will feel disengaged with the organization due to a lack of connection in the workforce which could potentially push them to find new employment elsewhere.

5. Poor performance

As said earlier, the underpayment of employees impacts the morale of the workforce. Which then leads to a decline in employees’ performances. When employees feel undervalued and are demotivated to work, their performances are affected, and productivity declines quickly. The quality of output is also affected and could leave customers and clients dissatisfied, leading them to look for products and services elsewhere.

6. Low loyalty

When employees are underpaid, they start to feel like their employers do not care about their well-being as much as they should. It is most likely for employees to lose trust in the company and start to find work elsewhere. Employees will feel like their best interests are not being considered during significant changes and decisions made by upper management and will begin to disengage from the workforce – lowering their loyalty and making the company’s turnover rate high.

7. Missed opportunities to hire quality talent

Companies that are not willing to pay their employees the adequate salary they deserve are at the risk of losing opportunities to attract and hire top talent that could help improve the business. Job seekers are looking for job roles that help enhance their knowledge and skills in their chosen professional field, all the while being compensated fairly for their efforts and labor. Even if a company can provide the job role the job seeker is looking for, it is likely they will go for another employer if the salary does not match their minimum expectation.

Read more: Underpayments – Don’t become a headline!

As enticing as it is for companies to underpay employees to save money in the long run, it can cause more harm than good and could even lead to legal cases being filed against the employer – racking up more expenses and damages than what they would have potentially saved from underpaying their employees.

The best way HR leaders can go about this is to make it a habit to check the local laws on minimum wage, research the industry trends on adequate pay for employees, and adequately offer a fair wage to its workforce. This way, the company stays competitive with job seekers and continuously satisfies their current employees’ needs and demands which improves the success of the business.