Today we begin a series of articles focused directly on employee safety which will cover in detail 5 key areas where improved safety performance will impact overall business performance and profitability. This first article will cover direct and indirect financial savings (insurance premiums, medical liability costs, regulatory fines, the avoidance of costs associated with lost labor hours/productivity and temporary staffing, and management resources needed to accommodate for missing worker skills). It’s a fairly dry topic, with plenty of numbers and statistics included, so I apologize in advance. But if I’m going to make an economic case for improved safety performance, this is the best starting point—so let’s dig in.
The most obvious direct impact of safety performance for your company is the cost of workers compensation insurance. The Insurance Information Institute provides this clear definition: “To protect employers from lawsuits resulting from workplace accidents and to provide medical care and compensation for lost income to employees hurt in workplace accidents, businesses are required to buy workers compensation insurance. Workers compensation insurance covers workers injured on the job, whether they’re hurt on the workplace premises or elsewhere, or in auto accidents while on business. It also covers work-related illnesses.”
Like any other insurance policy, the main cost to the employer is the annual premium, and there are 3 factors that determine your company’s workers comp premiums:
- Size of the employer’s payroll.
- Employee job classifications.
- Company’s claims experience.
The following formula is then used to calculate the exact premium:
Payroll (per $100) X Classification Rate X Experience Modifier = Premium
Your experience modifier, typically referred to as your MOD or EMR, is a numeric representation of your company’s claim experience, and is typically based on 3 trailing years of data. MODs are based on how your business compares to others in your industry with similarly classified employees. An average MOD is set at 1.00. Employers with fewer and less severe accidents than average have a MOD of less than 1.00.
The Safety Management Group states: “If your business has an EMR greater than 1.0 the reasons are simple. There has been a worker compensation claim that your insurance provider has paid. To mitigate the insurance company’s risk, they raise your worker compensation premiums. The bad news is this increased EMR sticks with you for 3 years. An EMR of 1.2 would mean that insurance premiums could be as high as 20% more than a company with an EMR of 1.0. That 20% difference must be passed on to clients in the form of increased bids for work. A company with a lower EMR has a competitive advantage because they pay less for insurance.”
It is not unusual for a small manufacturing business with about 25 employees and a payroll of roughly $1,000,000 to pay an annual workers comp insurance premium of $100,000, so a swing of 20% in either direction based on safety performance could easily mean one small company might have a $40,000 cost advantage every year over one of their competitors before they even manufacture any product!
Think of how this would add up over time, or if you employee hundreds or even thousands of people across your company? Tesla Motors has been in the news quite a bit over the last few years and is a manufacturing company that most people are pretty familiar with even beyond its enigmatic CEO Elon Musk. Tesla’s production and quality issues are constantly in the news, and the company struggles financially. What isn’t often covered however is Tesla’s extremely poor safety record. The rate of serious injuries at Tesla’s Fremont plant – those that result in days away from work, restricted duty, or job transfer – was approximately double the industry rate for 2015. This measurement is known as the DART rate (“Days Away, Restrictions and Transfers”). The report noted that the DART rate at Tesla in 2015 was 7.9 compared to the industry average of 3.9. (Source: EHS Today). Tesla employees approximately 45,000 workers and based on average auto workers’ salaries and industry workers comp insurance rates, they most likely should be paying an annual premium of ~$180,000,000 (if their safety record was typical for the industry). But since their employees are injured at 2x the normal industry rate, their MOD or EMR would be 2.0, so they are likely to be paying an additional $180,000,000 annually due to their poor safety record! It’s hard to comprehend. If I’m a shareholder, or if I’m on the board or an employee, I simply could not find this acceptable.
Beyond the immediate annual cost of premiums, The Professional Employer Organization INVOPEO states: The workers compensation costs to employer are often compared to an iceberg. The insurance company pays for the direct costs of the claim, also known as the tip of the iceberg. You pay for all the indirect, hidden costs of the claim. This is the giant portion of the iceberg below the surface you cannot see initially. OSHA estimates that you pay 1 to 4.5 times more than the insurance company by the time the claim is over. These costs include:
- Loss of a worker – may cause a reduction in efficiency, lost production, overtime, a reduction in quality of work and time/effort to rehire, retrain or find a temporary solution until your employee comes back to work.
- Management time – you and others in your organization will lose valuable production time because you will have to investigate the accident, manage the claim through interaction with the insurance company, spend time retraining and explaining to workers what is happening.
- Reputation and goodwill – this can include a loss of ability to obtain or bid for good jobs because your safety record is ruined. A loss of reputation in the community may depress your ability to find the best employees or worse, your own trusted employees begin to believe you have an unsafe, uncaring organization and leave. And if your accident is a serious, high-profile accident, you may find your company in the embarrassing position of being “film at 11.”
- Loss of equipment or products – the accident may have ruined your equipment or even damaged a customer’s product that you have to replace.
- Future insurance costs – having a workers’ compensation claim today most probably means you will pay more for insurance in the future. Insurance carriers will look at your claim record (loss runs).
These direct and indirect costs really do add up and have a significant material impact on the financial health of your company. We’ll keep exploring many other ways that improved safety performance will positively impact every area of your business in the coming weeks, but the foundation is now laid with real, measurable, and significant cost impacts.
Next week we’ll cover how improvement in workplace conditions (elimination of slip/trip/fall hazards, better lighting, improved ergonomics in work cells, etc.) directly leads to more efficient and less wasteful production environments. This will continue our transformational journey for your company—a transformation where you will play a key role and will be able to take great pride and satisfaction. You’ll help lead an effort to invest in your people and invest in making employee safety an integral part of their training and development. When you imbed these safety behaviors, while communicating them throughout the entire organization, you get happier, more relaxed and engaged employees. They’ll have more skills and resources to perform the tasks that drive your business forward every day. Don’t just say it—lead by doing it.