I hate to say it, but once morale has gone bad, I don’t know if there’s anything you can do to recover. It’s an issue of trust-building. If your employees are so quick to believe the things this other person said, that probably means that the communication and trust have not been very good for a while now.
What the employees probably should know is that they are doing a good job. A lot of people here have suggested that you go over policies with them. I think that’s just going to make it worse. You need to rebuild your relationship, and that is not done by making things more antagonistic. If you go over the policies, the employees are going to feel like you think they are children. They know this stuff.
When was the last time they got merit raises? When was the last time you praised them for their work? When was the last time you celebrated their work? I don’t mean those fake celebrations—I mean real appreciation. Of course, the best appreciation is a raise. When you go too long without receiving a raise, you begin to feel you aren’t appreciated.
There was an atmosphere of mistrust there already or one little outburst wouldn’t have had this effect. The other employees were quick to believe everything she said. There must have been resentments that were not apparent to you.
What do you do? Like I said, raises help. But more communication—from your end. Tell them more about what kind of work you do, and what is happening. Give them information about income and expenses. Show them how their work matters. Show them where they have done well, and also where they haven’t, but without blaming them. If there have been tough times, you want to work with them to improve. It’s not that they better improve or they’re out the door. Acknowledge your own mistakes, and be as tough on yourself as you are on anyone else.
If you want a team, you have to be a team. You are probably too isolated from them. I don’t know what you do, but you may want to consider walking around to see everyone where they work every day. Take an interest in how they are doing, and ask if there is anything you can do to make their jobs easier. This is about attitudes and trust. You would have to be honestly interested and caring. They will feel this, and attitudes will improve, I think. Your bottom line should improve as well—even if some of it is spent on higher wages. But you have to look at this as a long term effort—it could take years. The improvements may be slow, but once they are there, they will last a long time!