Hiring the right talent is a critical decision for any company. While no single person can single-handedly transform a business, the right talent contributes significantly to overall success and growth. Every team member must play a vital role in achieving an organization’s long-term goals. However, a poor hiring decision can have costly repercussions, especially in cross-border contexts.
Even hiring the right person comes with significant upfront costs. The average cost per hire in the US rose from $4,129 in 2019 to $4,700 in 2024, according to the Society for Human Resource Management. This represents a 14% increase in just a few years.
Beyond recruitment costs, onboarding, training and disruptions to team morale and productivity can lead to additional expenses.
While a good hire is an investment with high returns, a poor hire can drain resources. This rings especially true if termination isn’t managed correctly. The liabilities can quickly escalate, tying up your internal HR team, harming morale and damaging your company’s reputation.
For international companies hiring talent across borders, the risks are magnified. This is due to differing labor laws, cultural expectations and regulatory environments.
This blog post uncovers the hidden costs associated with hiring the wrong talent, using Japan as a primary example. We also draw parallels to other countries with stringent employment regulations.
The high cost of a bad hire
The financial implications of hiring the wrong person go far beyond the obvious costs of salary and benefits. Here are some of the hidden costs that companies may face:
- Severance and Compensation Costs: In many countries, severance and expected compensation upon termination can be substantial. While severance pay is not legally mandated in Japan, it is expected. Without a statutory cap in place, these payments can vary widely depending on the individual’s circumstances.
The lack of a statutory cap in Japan means the final figure can be much higher. Such unpredictability makes it difficult for companies to budget effectively for severance costs. Even in cases of mutual separation, where both parties agree to part ways, companies still face significant financial exposure for bad hires. - Litigation Costs: If a company decides to terminate an employee and the employee disputes the decision, the company may face significant litigation costs.
In Japan, for example, termination is highly regulated and must fit specific criteria and processes as determined by the courts. For example, employers must exhaust all possible remedies before considering termination. This includes implementing a performance improvement plan (PIP) that typically spans at least six months. All steps should be meticulously documented as evidence for potential arbitration or litigation. - Lost Productivity and Morale Impact: A poor hire can negatively impact the larger team’s morale and productivity. An underperforming or misaligned employee can disrupt team dynamics, reduce overall efficiency and create a toxic work environment. This not only affects current projects but can also lead to higher turnover rates as other employees become dissatisfied.
- Cultural Fit and Miscommunication: In cross-border hiring, cultural fit is often as important as professional skills. HR teams must understand cultural differences before planning any separation, as each situation may require a different strategy based on local customs. In Japan, for example, an understanding of local social norms and a high level of conformity to workplace expectations are essential. Employees who don’t fit culturally may create friction, misunderstandings and even damage client relationships. This can result in additional costs related to training, mediation or potential reputational damage. Supporting new employees in adapting to the company culture can help mitigate these risks.
More on navigating the cross-border legal landscape
The process of terminating an employee in any jurisdiction is fraught with challenges, especially if your internal HR team is unfamiliar with a country’s legal landscape. As a frame of reference, here are some key points to consider:
- Stringent Regulations: Terminating an employee is never straightforward, with potential risks and ramifications always looming. For example, Japanese courts are likely to declare a termination void unless it is deemed “socially reasonable” and “socially acceptable.” Unlike in some other countries, poor performance or misconduct alone is not sufficient grounds for termination.
- Probation Period Limitations: Most countries enforce a probation period, where employers can assess a new hire’s performance and fit before confirming permanent employment. However, what is a legal right may not be the social expectation. A probationary period does not always make terminating an unsuitable employee as straightforward as it may seem. In Japan, for example, after the initial 14 days, employers must follow proper procedures much like they would after the probation period ends. This means employers cannot rely on probationary terms to mitigate the risk of a bad hire.
- Exhausting All Remedies: Before termination can even be considered, employers are often required to prove that all other remedies have been exhausted. In Japan, this includes implementing a PIP, reducing wages and offering the employee opportunities to voluntarily resign. Exhaustive processes like this can take six months or more, during which time the employee must continue to be compensated.
- Cultural Sensitivity and Compliance: Discussions around termination must be handled with extreme care. In Japan and many countries, companies are even advised to refrain from using the word “termination” in discussions with employees. This is because, legally speaking, employment cannot be ended unilaterally. Similarly, mentioning “poor performance” without substantial evidence can lead to allegations of unfair dismissal. Such nuances only complicate the separation process.
A global dilemma
Japan is a prime example of stringent labor protections, but it’s far from unique. Countries across the globe – from Africa to Asia Pacific (APAC), Latin America (LATAM), the Middle East and North America – each have their own rigorous labor laws.
For instance, European nations like Spain, Portugal and Italy also impose significant challenges when it comes to terminating employees. In Spain, employers cannot even directly contact employees who miss work. They must instead check a government portal for medical certificates. This can extend the process for over a year, often requiring continued reduced salary payments.
Labor laws are also constantly evolving. At GoGlobal, we help our clients operationalize over 500 legislative updates annually that impact employer-employee relationships. These changes often tilt the balance in favor of either employers or employees, adding another layer of complexity to global hiring.
Whether you’re operating in Asia or the Americas, understanding these variations and keeping up with legal shifts is critical for managing hiring risks effectively.
Tips for avoiding costly hiring mistakes
Given the costs and challenges of terminating employees across jurisdictions, international companies should be proactive in hiring. Here are tips to avoid bad hires:
- Rigorous Screening and Interview Process: Implement a thorough screening process that includes multiple rounds of interviews, cultural fit assessments and practical skill tests. Engaging with local experts who understand the cultural and legal context can also provide valuable insights.
- Clear Communication and Documentation: All terms of employment must be clearly communicated and documented, including expectations around performance, cultural fit and job responsibilities. This reduces the risk of misunderstandings and provides a clear framework for managing any future disputes.
- Spotting Red Flags Early: During the recruitment process, be on the lookout for telltale signs of a potentially difficult employee. These can include a lack of cooperation, resistance to feedback, poor cultural fit or a history of litigious behavior. Identifying these red flags early can help avoid hiring mistakes.
- Expertise in Local Labor Laws: Before hiring in a new country, take the time to understand the local labor laws and regulations. Engage with local HR experts or legal advisors to ensure compliance and develop a strategy that minimizes risk.
Make your global hiring work for you, not against you
Hiring the wrong talent is a costly mistake that can have far-reaching implications, especially for international companies operating in countries with stringent labor regulations like Japan.
Understanding the hidden costs, from severance and litigation to lost productivity and cultural misalignment, is necessary for informed hiring decisions.
By adopting a rigorous global hiring process and staying informed about local labor laws, companies can mitigate these risks and build a stronger, more cohesive international team.
Learn more about regulations and hiring in Japan here: Hire in Japan | GoGlobal
Contact us today to learn more about navigating the complexities of international hiring and HR management.