The cost of an employee injury should be fairly straightforward, but actually involves more factors than some organization’s realize. The true cost of a reportable injury is the combination of direct and indirect expenses, both of which have a severe, negative impact on your top line revenue. It is important to understand your indirect expenses and consider cost-saving options to reduce incidents.
The work environment and job tasks are obvious aspects in workplace injuries. The Center for Disease Control (CDC) recently noted additional factors which account for a rise in workplace injuries and illness that include:
More employees are working when they are sick
Chronic diseases (diabetes, heart disease)
A rapidly-aging workforce
Internalized issues of stress, fatigue and depression
These factors alone account for $150 billion to $250 billion, or 60%, of the total cost of worker illness but few health and safety plans address these issues.
The Liberty Mutual Workplace Safety Index reports that $1 billion per week is spent on the most disabling, nonfatal workplace injuries which are:
Overexertion Involving Outside Source (24.4% - $15.08 Billion)
Falls on Same Level (16.4% – $10.17 Billion)
Falls to Lower Level (8.7% – $5.4 Billion)
Struck By Object or Equipment (8.6% – $5.31 Billion)
Other Exertions or Bodily Reactions (6.7% – $4.15 Billion)
Roadway Incidents Involving Motorized Land Vehicle (4.8% – $2.96 Billion)
Slip or Trip Without Fall (3.8% – $2.35 Billion)
Caught In/Compressed By Equipment or Objects (3.2% – $1.97 Billion)
Struck Against Object or Equipment (3% – $1.85 Billion)
Repetitive Motion Involving Micro-Tasks (2.9% – $1.82 Billion)
Employees who sustain these types of injuries are often out of work for 6 or more days and result in high direct expenses and indirect costs.
The direct expenses of an accident and resulting injuries are fairly straightforward. These are the numbers directly represented in accounting features and therefore recognized as impacting your profitability. Direct expenses include:
Medical, hospital and rehabilitation expenses
Workers compensation payments, and
Higher insurance premiums or even loss of insurability
These direct costs are obvious and can be high, but they are only a portion of the total cost your company pays as a result of an accident.
When an injury occurs, it triggers a series of events that are not accounted for in the direct expenses of the incident. This hidden costs arise from a multitude of factors which all stem from the initial injury and include:
Lost Time. After an injury, the employee will not return to work for any time from an hour to weeks. The Bureau of Labor Statistics estimates that for workers in heavy construction, each nonfatal occupational injury or illness results in an employee’s absence for eight to nine days of work. There are additional lost time issues for the people who stopped work to help or treat the injured person.
Productivity. The accident will impact everyone in the area and may disrupt productivity for hours or days and can result in quality disruptions, unmet orders or missed deadlines. There may be a damaged machinery or equipment that must be repaired or replaced and there may be a need for cleaning the area where the accident occurred. Overtime costs also increase as employees struggle to make up for time lost due to the accident.
Incident Investigation and Reporting. Supervisors and foremen need to investigate the cause of the accident, which may take minutes, hours or days. Depending on the injuries incurred, OSHA requires immediate reporting, which disrupts all levels of the operations from foreman to administration. Management time might be spent addressing questions from regulators or attorneys. Legal representation may be required and legal fees will mount.
Staffing Issues: Depending on the anticipated lost days and job requirements, you may need to hire and train temporary employees. This begins with posting the job, interviewing appropriate candidates and then hiring the person on a part-time basis. Training must occur to assure the temporary employee is effective and safe on your worksite.
Reputation: Work related accidents and injuries can damage your company’s reputation in your community and your industry. Recent changes in OSHA reporting requirements may result in the public dissemination of your injury data, which may impact your relationships with customers and clients.
Indirect costs can be as high as or higher than the direct costs of the accident and are certainly more unpredictable. Since these costs are not flagged within business accounting systems as caused by accidents and injuries, they are the “hidden” costs, but represent billions of dollars of expense to US businesses. When assessing the true costs of accidents within your organization, each of these factors must be taken into account. These hidden costs are high and have a significant impact on the organization’s top line revenue and can have negative, long term ramifications.
The actual cost of even one injured worker adds up quickly. To help understand the true cost of a workplace injury, OSHA provides a cost estimate worksheet as part of its Safety Pays program. The process is simple but the results are surprising. This worksheet is recreated below to help you understand the level of sales your company must achieve to pay for the cost of a typical workplace injury.
To calculate the direct cost, enter the following information:
Total value of the insurance claim for an injury or illness $______________
(Medical costs and indemnity payments)
To calculate the indirect cost of this injury or illness, multiply the direct cost by a cost multiplier. The cost multiplier that you use will depend on the size of the direct cost.
|
If your direct cost is: |
|
Use this cost multiplier: |
|
$0 - $2,999 |
|
4.5 |
|
$3,000 - $4,999 |
|
1.6 |
|
$5,000 - $9,999 |
|
1.2 |
|
$10,000 or more |
|
1.1 |
|
Direct Cost |
x |
Cost Multiplier |
= |
Indirect Cost |
|
$ |
$ |
$ |
|
Direct Cost |
+ |
Indirect Cost |
= |
Total Cost |
|
$ |
$ |
$ |
To calculate an accident's impact on your profitability, you will use your profit margin to determine the sales your company would need to generate to pay for this injury or illness.
Divide your total profits by total sales to get your profit margin
|
Total profits |
= |
Profit Margin |
|
$ |
= |
|
Divide the total cost of an injury or illness by your profit margin to determine how many sales your companies must generate to pay for the injury or illness. Keep the profit margin in decimal form (for example, .04)
|
Total Cost of |
= |
Sales Required to Pay for Injury or Illness |
|
$ |
= |
$ |
If your profit margin is:
|
Total Cost |
1% |
2% |
3% |
4% |
5% |
|
$1,000 |
$100,000 |
$50,000 |
$33,000 |
$25,000 |
$20,000 |
|
$5,000 |
$500,000 |
$250,000 |
$167,000 |
$125,000 |
$100,000 |
|
$10,000 |
$1,000,000 |
$500,000 |
$333,000 |
$250,000 |
$200,000 |
|
$25,000 |
$2,500,000 |
$1,250,000 |
$833,000 |
$625,000 |
$500,000 |
|
$100,000 |
$10,000,000 |
$5,000,000 |
$3,333,000 |
$2,500,000 |
$2,000,000 |
Using this formula, if a worker sustained an injury and the direct cost to the company is $2,000, that number is multiplied by 4.5 to determine the indirect cost ($9,000). Add the direct and indirect costs together for a total cost of $11,000. Now, calculate your profit margin by dividing total profits by total sales. If, after the cost of goods sold, your profit on $10,000 of sales is $2,000, your profit margin is .2 or 20%. Now, divide the total cost of the injury ($11,000) by the profit margin (.2) and you will get $55,000. This is how much revenue/sales your company needs to make simply to cover the costs of one work injury. If your profit margin is lower, the amount of sales you will need to generate to cover these costs are much higher.
Each work injury takes money from your top line revenue and the amount of sales needed to cover the costs of these injuries can be staggering. The best way to address this issue is to implement an effective health and safety program to reduce injuries. The cost of implementation or improvement of your ES&H systems will quickly be recouped in reduced injuries, often with a high ROI.
The best way to minimize the direct and indirect costs of accidents is to lessen the number of incidents that occur. One of the most effective tools available to help you achieve this is an ES&H software system which will:
Minimize incident reporting time;
Maximize accuracy and completeness of incident details;
Increase corrective action response time due to immediate access to incident reports;
Identify trends and problems to allow for effective response;
Automatically inform various parties of needed information or action;
Complete accurate OSHA and other reports; and
Conduct post-injury case management.
This type of software system can reduce the number of reportable injuries by quickly addressing problems to avoid others becoming hurt.
You can also manage your Workers’ Compensation exposure by:
Developing a compliant, effective Injury and Illness Prevention Program. This includes creating a post-accident response protocol to assure that appropriate people know what to do in these situations.
Assuring all supervisors and foreman receive appropriate safety training and that safety compliance by their employees is a component of their annual review.
Making occupational safety an organization-wide commitment from administration to entry-level employees.
Developing relationships with the occupational medical clinics that participate in your medical provider network (MPN). Assure that your staff members know the location and name of these clinics and utilizes them in the event of a non-emergency accident.
Use ES&H software or other tools to actively manage open claims to assess if treatment is proceeding appropriately and the reserves are fair.
Take a proactive approach to environmental health and safety to reduce incidents and their negative financial impact on your organization’s top line revenue.
Work-place injuries costs businesses billions of dollars each year in direct and indirect costs. The indirect costs are the hidden expenses that are rarely identified as caused by the injury but are the direct consequence of the incident. These indirect costs have a significant, negative impact on your business’ top line revenue and utilizing ES&H software can help you reduce injuries and the direct and hidden costs that result from them.
Take a closer look at our EHS software solutions.
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