The Hidden Costs of Retaining Bad Employees—and How Small Business Owners Can Fix It

Last week, we discussed how to deal with a backstabbing employee. But what happens when business owners don’t fire them, even though they continue to hurt their peers? Well, as you probably imagine, the results aren’t pleasant (and more than likely, horrible).

This seems self-evident, though sometimes, entrepreneurs choose to ignore the problem because everything else is all right. That’s a recipe for disaster, and can easily lead to bigger problems. So, read on to learn what’s in store.

Why Clinging to Underperforming or Toxic Employees Secretly Erodes Your Company’s Foundation

Running a small business means wearing many hats, but one of the toughest decisions is letting go of an underperforming or toxic employee. Many owners hesitate, hoping things will improve or fearing the hassle of replacement. Yet, clinging to “bad fits” can quietly erode your company’s foundation. According to research from Harvard Business School, a single toxic employee can cost a business far more than their salary—up to $12,800 in turnover alone —by driving away good talent. For small teams, this chronic drain often outweighs the short-term pain of firing.

Risks You Run

The risks are multifaceted and compounding. First, productivity plummets. A poor performer doesn’t just underdeliver; they drag everyone else down. Studies show teams with even one toxic member see 38% lower engagement and higher error rates. Good employees pick up the slack, leading to burnout and resentment.

Second, morale and culture suffer irreparably. High-performers notice when bad behavior goes unchecked—it signals that mediocrity is tolerated. Gallup data indicates disengaged workers (often spurred by toxic environments) cost the U.S. economy trillions in lost output, with small businesses feeling it acutely through voluntary quits. In fact, good hires leave at 54% higher rates around toxic colleagues.

Financially, the hit is brutal. Replacement costs for a departed star can run 1.5–2x their salary in recruiting, training, and lost knowledge. Customers notice too—sloppy work or rude service drives them away, damaging your reputation in a word-of-mouth world. Legally, ignoring issues like harassment or consistent underperformance risks lawsuits if they escalate, especially without documentation. In at-will states (most of the U.S.), you can terminate for any non-discriminatory reason, but delays invite claims of retaliation or unfairness.

Small business owners often delay for understandable reasons. For instance, “They’re nice,” “Hard to replace,” or “What if I can’t find someone better?” But as one expert notes, keeping them is a disservice to both the employee (trapped in a mismatch) and your company (stuck in mediocrity).

Rectifying the Situation for a Proactive Path Forward

The good news? You can address this decisively while minimizing fallout. Start with prevention through better hiring. Use structured interviews, skills tests, and reference checks to spot red flags early. Clear job descriptions and probation periods set expectations upfront.

When issues arise, document relentlessly. Track performance with specifics, including missed deadlines, client complaints, or policy violations. Issue verbal warnings, followed by written ones via a Performance Improvement Plan (PIP). A 30–60 day PIP outlines measurable goals, support offered, and consequences—giving a fair shot while building your case. Consult an employment attorney or an HR service early; small businesses without this support often face surprises under laws like the FMLA or anti-discrimination rules.

When Involuntary Separation Becomes a Necessity

If improvement doesn’t happen, terminate thoughtfully. Schedule a private meeting at week’s end (e.g., Friday afternoon) to allow time for processing. Have a witness (HR or trusted manager) present. Be direct by saying, “We’ve discussed these issues, and we’ve decided to end your employment effective today.” Avoid debate—focus on facts, express appreciation for past contributions, and outline next steps: final paycheck (immediate in many states), benefits continuation (COBRA notice), and property return.

Prepare a transition. Reassign duties, notify the team neutrally (“We’ve parted ways with [Name]; we’ll redistribute tasks”), and offer a neutral reference if warranted. Some provide severance (1–2 weeks’ pay) for goodwill, though not required.

Post-firing, reinforce culture. Use the moment to hire rigorously—seek A-players who align with your values. Many owners report relief and renewed energy after taking action; the “acute pain” of change beats the chronic drag.

In the end, firing isn’t failure—it’s leadership. As Inc. Magazine puts it, underperformers aren’t doing you (or themselves) a favor by staying. For small businesses, swift, fair action protects your team, customers, and bottom line. Act now, and watch your venture thrive.

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There’s No Synergy and Little Camaraderie between My Tenured Staff and New Hires… What Do I Do?

So, you had a wonderful staff and everything was going really well. Then, the whole world fell into chaos due to the pandemic. But, you managed to work your way through and even brought on additional personnel. It was a reasonable and logistical decision. Now, you’re caught in a quagmire because your tenured employees aren’t syncing with your new hires. What can you do before it becomes too big a problem? Simple, take immediate action, size up differences, be impartial, formulate an action plan, and then keep an eye out. Every Solution Breeds New Problems It sure seems that when you find a way to fix an issue, it only creates another problem. Although it’s a well-known cliche, it’s certainly something that practically every business has experienced. When you brought aboard fresh talent, you probably pictured them working side by side with your existing staff. Instead, you’ve got a kind of civil war unfolding in your place of business. …it is important to intervene early. In extreme examples, the conflict might be due to one employee who is creating a problem, but most often it is a matter of having two personalities that don’t mesh well together. The sooner a solution is reached, the sooner both employees will be happy to be able to move on—and the sooner their coworkers will be relieved to feel the easing of tensions in the office. —The Balance Careers Obviously, you can’t let this go on and need to address it as quickly as possible. If you don’t, it will only worsen over time and divisions will grow deeper among your combative team members. They might even go so far as to quit abruptly in a moment of anger and leave you to deal with the very untimely fallout. Instead of letting this situation grow out of control, you need to intervene and take rational, measured action. Otherwise, you might also become emotionally overcharged and that will only lead to a lot more trouble. How to Deal with Employees Who Don’t Work Well Together There is always a potential for personalities to clash. It’s the opposite problem of having employees who get along too well, to the point they isolate themselves from the rest of the staff and that too becomes an issue. Because people are inherently social, they really like to get along. But, there are individuals who feel an innate need to do their own thing and this also can present a number of problems. If you have a tenured staff that isn’t meshing with new hires, here are a few bits of advice about how to deal with these circumstances: Identify the problem(s). We’ll start with the most obvious step to take. And that is, to identify the root issues of what’s causing so much chaos. You might find there are very petty differences here that have managed to quickly balloon out of proportion. If so, that’s actually good news because it’s a much easier fix. However, if you discover it’s a very wide and deep rift, you’ll have your work cut out for you. Understand basic personalities. It’s not just enough to understand what’s going on at the most basic level, it’s imperative that you also know precisely what types of personalities are involved. If you don’t have a firm grip on these elements, there’s really nothing that you can do to end the feud. If necessary, take a little time to get to know your new people better so that you can approach this with confidence. Don’t show favoritism to anyone. If there’s one thing that will sabotage all of your healing attempts, it’s showing favoritism. Usually, this trait appears on behalf of the people you know best and is biased against the new people in the business. Even if it’s the other way around, favoritism is a poison pill. Be objective and think things through before you take any significant action. Present some real, workable solutions. Obviously, as the leader of the business, you’ll be the one who needs to come up with one or more solutions or a set of compromises. Regardless of what these are, don’t apply them unilaterally. Instead, speak to people individually in order to get a sense of what they think is most fair, then bring everyone together as a group to talk it out. Monitor the situation objectively thereafter. Lastly, don’t pull yourself away from the situation too quickly. Instead, watch what unfolds over the next few days to several weeks and be ready to make changes if necessary. You could discover that it’s just not workable and have to make changes to your staff or even put people in different roles. Hopefully, they will begin to work well together and develop strong professional relationships. What other suggestions do you have for dealing with team members who don’t necessarily get along? Please take a moment or two to express your thoughts and experiences; you might just help someone else out in a big way! Interested in learning more about business? Then just visit Waters Business Consulting Group.

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How Entrepreneurs can Improve their Mental – and therefore Physical – Health

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