Published: October 2025
Every business owner knows bad hires are expensive. But most drastically underestimate the actual financial impact. When we calculated the total cost of a toxic employee across an Australian SME over 12-18 months, the figure reached $94,000. That's not an exaggeration. That's the conservative mathematical reality.
This isn't about someone who simply underperforms. This is about the actively destructive employee who drains resources, destabilises teams, and creates ongoing operational damage. Understanding these costs helps businesses make faster decisions when warning signs appear.
Before diving into the detailed breakdown, here's what one toxic employee costs an Australian SME over 12 months:
This represents approximately 1.26 times the employee's annual salary ($75,000) in total damage. And this is conservative. High-impact roles can easily double these figures.
Before examining costs, we need clarity on what constitutes "toxic" versus merely underperforming or mismatched to a role.
A toxic employee exhibits these patterns:
The critical distinction: performance issues alone don't make someone toxic. An employee trying hard but lacking skills is a training problem. An employee actively damaging your culture and team effectiveness is a toxic problem requiring different action.
Let's start with a $75,000 annual salary employee whose actual productive output falls to roughly 30% of expectations due to time spent in conflicts, poor quality work requiring rework, and general disengagement.
Calculation:
For our calculation, we'll use a 70% productivity loss (30% productive) over 12 months, but attribute $18,000 to the individual's direct productivity loss after accounting for the minimal work they do complete.
The truly insidious cost is the management time consumed addressing issues.
A direct manager earning $110,000 annually spends an estimated 3-4 hours weekly dealing with toxic employee situations. This includes:
Calculation:
We're using $8,500 conservatively, assuming some weeks require less intervention.
Toxic employees don't operate in isolation. Their behaviour creates a ripple effect across the team.
Consider a team of five people (including the toxic employee) where the four other team members experience a 10% productivity decrease due to:
Calculation:
Total Lost Productivity: $41,500
Australian businesses need to follow proper process when terminating employment, even in straightforward situations.
Subtotal: $3,500
Replacing the employee requires substantial investment:
For businesses using recruiters, add $11,250 minimum. For those recruiting internally: $5,000-6,000 in hard and soft costs.
We'll use $8,500 assuming a hybrid approach where internal team handles initial screening but may use specialised recruitment support for final candidate sourcing.
New employee onboarding isn't just showing someone their desk.
Subtotal: $10,000
Total Recruitment and Termination: $22,000
Note: This section provides cost estimates only and does not constitute legal advice. Always consult with an employment lawyer or workplace relations specialist for your specific situation.
Building a proper termination case in Australia requires substantial documentation:
Subtotal: $3,000
Some terminated employees consider lodging unfair dismissal claims. Most don't proceed, but the possibility creates costs.
Conservative scenario (employee discusses but doesn't formally lodge):
Moderate scenario (claim lodged but settles before hearing):
Our calculation uses a blended risk probability based on general industry data:
Expected value: ($2,000 × 0.8) + ($15,000 × 0.15) + ($35,000 × 0.05) = $5,600
However, we'll use $9,000 to account for the reality that toxic employees are more likely than average to pursue claims, shifting probabilities higher.
Total Legal and Compliance Considerations: $12,000
Toxic employees drive good employees away. This is often the highest cost but the hardest to precisely calculate.
Before people actually quit, team morale deteriorates:
Subtotal: $4,000
Research consistently shows toxic employees increase turnover rates in their immediate teams by 30-50%. In an Australian SME context:
If one additional team member leaves specifically due to the toxic employee (beyond normal turnover), the costs include:
Total if one additional employee leaves: $15,000
However, not every toxic employee situation results in direct additional turnover. Using a 66% probability that at least one person leaves specifically because of the toxic colleague: $15,000 × 0.66 = $10,000 expected cost
Total Team Morale and Turnover: $14,000
This is the most variable category, ranging from zero (back-office role with no customer contact) to catastrophic (sales or customer service role with direct client relationships).
Customers interact with your business expecting consistent quality. Toxic employees create:
In professional services, this might mean writing off 10-15 hours of billable time to redo poor work: $2,500 at $175/hour blended rate.
In worst cases, customers leave specifically due to poor experiences:
We're being conservative here. In some industries (hospitality, retail, professional services with high touch), one toxic employee can easily drive away $10,000-50,000 in customer lifetime value.
Total Customer and Revenue Impact: $5,000
Summary of the conservative 12-month cost estimate for one toxic employee:
TOTAL COST: $94,500
This represents approximately 1.26 times the employee's annual salary in total damage. And this is conservative. High-impact roles (senior positions, customer-facing, technical specialists) can easily double these figures.
If the costs are this clear, why do Australian business owners tolerate toxic employees for months or years?
Many owners worry about following correct procedures. While proper documentation matters, the cost of building a proper performance management case is dramatically lower than the cost of inaction. Consulting with workplace relations specialists early in the process can provide clarity on requirements.
Business owners are often optimistic. They believe the next coaching conversation, the next written warning, or the next team intervention will finally create change. This hope is rarely rewarded with toxic employees as distinct from merely struggling ones. Underperformers often improve with support. Toxic employees rarely do because the issue is behavioural and attitudinal, not skill-based.
Particularly in SMEs, owners are managing day-to-day operations, business development, and financial management simultaneously. Addressing a toxic employee requires sustained focus, documentation, and process. It's easier to keep tolerating the situation than to carve out time for resolution. However, as our calculations show, manager time is being consumed anyway through ongoing issues rather than invested in resolution.
Sometimes the toxic employee has allies or the manager worries about seeming harsh. However, research consistently shows that teams generally want toxic colleagues removed. The relief when toxic employees depart is nearly universal. Good employees silently celebrate, morale improves, and productivity rebounds.
Catching toxic behaviour early reduces total cost substantially. Watch for these patterns:
Consistent blame-shifting. When things go wrong, the employee immediately identifies external causes, other people's failures, or systemic problems rather than ever accepting responsibility.
Selective high performance. The employee delivers excellent work when senior leadership is watching but returns to problematic behaviour when direct oversight reduces. This indicates they understand expectations but choose not to meet them consistently.
Isolation from team. Other employees begin excluding the person from informal communications, lunches, or after-work activities. You notice people volunteering to work on any project except those involving this individual.
Increased complaints. HR or management receives more frequent concerns from colleagues. These might be framed diplomatically ("I'm having trouble collaborating with X") but the volume and consistency indicate a pattern.
Defensiveness to feedback. Any constructive criticism triggers defensive responses, lengthy justifications, or accusations of unfair treatment. The employee cannot receive feedback without escalation.
When you've identified a genuinely toxic employee, proper process matters. Note: This is general information only, not legal advice. Consult with workplace relations specialists for your specific situation.
Start a formal file documenting specific incidents with dates, witnesses, and impacts. Vague notes like "bad attitude" are worthless. Specific records like "October 15, 2024: Refused to attend project meeting, told colleague 'I'm not paid enough to care about this project', witnessed by two team members, resulted in project delay" provide defensible evidence.
Schedule a formal meeting outlining specific behavioural expectations. This isn't about "improving attitude" but concrete actions: "Attend all scheduled team meetings unless prior approval received" or "Complete assigned work by agreed deadlines without requiring colleague intervention."
Put expectations in writing and have the employee acknowledge receipt.
Create a formal PIP with 30-60 day timeframe (depending on role complexity). Include:
Before terminating, have your documentation reviewed by professionals who understand Australian workplace law. This investment provides peace of mind that you've followed correct process and reduces risks substantially.
When the time comes:
The positive impacts of removing a toxic employee appear faster than most owners expect:
Week 1-2: Team members report immediate relief. Meeting dynamics improve as people speak more freely without managing conflict.
Week 3-4: Productivity increases as energy redirects from interpersonal management to actual work. Manager time frees up substantially.
Month 2-3: Team morale visibly improves. Sick leave usage drops, collaboration increases, and innovation resumes as people feel psychologically safe contributing ideas.
Month 4-6: With the new replacement onboarded and integrated, team productivity often exceeds pre-toxic employee levels as the replacement brings fresh energy without the cultural damage.
Australian business owners consistently report wishing they'd acted sooner. The stress of the decision and process is sharp but temporary. The ongoing cost of tolerance is chronic and compounding.
While this article focuses on costs of existing toxic employees, prevention during hiring substantially reduces risk:
Reference checks done properly. Don't just verify employment dates. Ask specific questions: "How did this person handle feedback?" and "Would you rehire them?" Listen for hesitation or diplomatic non-answers that signal problems.
Behavioural interview questions. Ask candidates to describe specific situations where they disagreed with a manager's decision, made a mistake, or faced team conflict. Listen for whether they demonstrate accountability or blame others.
Team interviews. Have candidates meet with potential colleagues, not just managers. Team members often detect interpersonal red flags that don't appear in formal interviews.
Probation period assessments. Use the first 3-6 months to actively assess cultural fit alongside performance. It's far cheaper to exit someone during probation than after 12 months of damage.
Beyond the direct costs calculated above, consider the opportunity cost. What could your business achieve if that manager time, team energy, and financial resources were invested in growth rather than managing dysfunction?
That $94,500 could fund:
Toxic employees don't just cost money directly. They consume the finite resources of attention and energy that should drive business forward.
If you're reading this article while tolerating a toxic employee situation, you likely already know action is needed. The calculations above provide financial justification for what your instinct already tells you.
Set a clear timeline. If you're currently building a performance management case, commit to a decision point 60-90 days maximum. If you haven't started formal documentation, begin this week.
Your team, your business, and your own wellbeing will benefit more from decisive action than prolonged tolerance of a situation that isn't improving.
How do I know if an employee is truly toxic or just having a rough period?
Look for patterns over time rather than isolated incidents. A toxic employee shows consistent patterns across 3-6 months despite feedback and support. Someone having a rough period typically responds positively to support, shows genuine remorse for impacts on others, and demonstrates improvement when personal circumstances stabilise. If you've provided clear feedback and support twice with no change, you're likely dealing with toxicity rather than temporary challenges.
Can a toxic employee ever be reformed?
Rarely in their current role and team context. The behaviour patterns are usually deeply ingrained and the damaged relationships with colleagues make fresh starts nearly impossible. Approximately 5-10% of toxic employees successfully transform after serious wake-up calls (formal warnings, demotions), but 90% either leave voluntarily or require termination. Don't bank on being the exception.
What if the toxic employee is technically highly skilled?
Technical skills without cultural fit still produce net-negative value once you calculate total costs. A highly skilled toxic employee might complete projects successfully but destroy team morale, drive away other talented staff, and consume disproportionate management resources. You're almost always better off with a moderately skilled team player than a toxic star performer.
How long should a performance improvement plan run?
For behavioural issues typical of toxic employees, 30-60 days is appropriate. This is long enough to demonstrate genuine commitment to change but short enough to prevent extended damage. Longer PIPs (90+ days) are more suitable for skills-based performance issues where employees need time to learn new capabilities.
How do I explain the termination to remaining team members?
Keep it brief and professional: "X is no longer with the company. We've made arrangements to ensure their responsibilities are covered during the transition." Don't disparage the departed employee or share details about performance issues. Most team members will understand without explanation, and good employees will be relieved rather than concerned.
Should I offer a settlement to avoid potential claims?
Sometimes, particularly if your documentation is incomplete or the employee explicitly threatens action. A settlement offer of 2-6 weeks additional pay in exchange for a signed separation agreement can be cheaper than defence costs. However, don't lead with this approach as it signals weakness. Consult workplace relations specialists about your specific situation.
What if the toxic employee is friends with the business owner?
This is especially common in SMEs. Personal relationships don't negate professional requirements. If the behaviour meets the toxic criteria, it's damaging your business regardless of friendship. Consider whether the friendship would survive watching your business suffer or other employees leave because you protected one person. Real friends understand when their behaviour isn't compatible with a role.
How much should I budget for the termination and replacement process?
For an Australian SME terminating a $75,000 employee, budget $15,000-25,000 for the complete process including professional consultation, recruitment, and onboarding. This feels substantial but remember you're currently spending far more tolerating the toxic behaviour. The investment in proper process protects against much larger exposure down the track.
Where can I get proper advice on workplace relations?
Consult with employment lawyers or workplace relations specialists who understand Australian workplace law and Fair Work Commission processes. Industry associations often provide members with access to HR advice lines. The Fair Work Ombudsman website (fairwork.gov.au) also provides general information about workplace requirements, though it cannot provide specific legal advice for your situation.
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