Safety Program
Is Your Safety Program Saving You Money?
Most of us desire a safe workplace because no one should have to suffer a painful injury on the job. Nor do we want to have firsthand experience with an occupational fatality. These humane concerns are usually at the heart of a company's Injury Prevention Program. There are other important reasons for preventing employee accidents too, and they are financial in nature. The goal of most organizations is a profitable operation without it, jobs may disappear. The expenses associated with injuries cut deeply into this profit, and can make or break the ultimate success of your company. These costs can be avoided, or significantly reduced, if an Injury Prevention Program is in place. As a supervisor, you should try as hard to control accident costs as you do to increase production revenues. The following information will help you understand the cost factors associated with work-related injuries, and the vital role you play in helping to control these expenses.
Variable Costs - Claims Experience
Insurance coverage is designed to cover the cost of unplanned events-both individuals and organizations need this "assurance" in order to go about their lives and business without the fear of financial disaster. But premiums usually go up when claims are higher than average, whether the coverage is for an automobile, personal property or workers' compensation. In most cases, they seldom come down. However, industrial insurance premiums are different. These premiums increase for companies and industries that have above average claims and costs; but they also decrease when the pattern is reversed. This is because workers' compensation insurance is "experience rated." Here is how it works:
The Experience Modification Factor
The standard annual premium which employers pay for workers' compensation coverage is determined, in part, by the industry in which they operate and by the following equation:
Annual Gross Wages Paid to Employees
(multiplied by)
The Established Dollar Rate For Every $100 of Payroll
(multiplied by)
A Firm's Experience Modification Factor
EQUALS
The Standard Annual Premium
A firm's experience modification factor (usually known in the industry as "EMF" or "x-mod" for short) is calculated every year by the appropriate rating bureau or State agency. The calculation formula uses claims information from your company's prior three years. A new company with no prior loss history is automatically assigned an EMF of 1.00 until three years of loss data is available. An EMF of 1.00 is considered to be average. The formula for calculating EMF is very complicated and there is no useful reason to cover it here.
The EMF formula is weighted to place more emphasis on the frequency of claims than on the cost of one or a few expensive claims. The justification for this formula weighting is that high frequency will tend to increase the possibility of a more serious accident while just one severe accident may represent an isolated event. EMF is recalculated every year, as the claims data from the oldest year of the three years is dropped from the calculation and data from the new year is added.
(multiplied by)
The Established Dollar Rate For Every $100 of Payroll
(multiplied by)
A Firm's Experience Modification Factor
EQUALS
The Standard Annual Premium
In order to illustrate how EMF affects the annual premium, let's assume we have three companies which have the same type of operation and employ the same number of employees. Let's also assume that these three companies pay their employees exactly the same wage. Now let's suppose that the premium rate for every $100 of payroll is $10. Finally, we'll estimate the annual gross wages to be $500,000 for each company. Using the formula given earlier, however, the three companies have different loss histories and therefore each has a different EMF.
- Company A is a new company with no loss history. Because of this, they are assigned an EMF of 1.00.
- Company B has a very good loss history with minimal claims costs and an EMF of 0.75.
- Company C has a poor history with many claims-- some of which are costly-- and an EMF of 1.5. They could be paying much less for their insurance coverage!
| Company | Wages | Rate | EMF | Premium |
| A | $500,000 | $10.00 | 1.00 | $50,000 |
| B | $500,000 | $10.00 | 0.75 | $37,500 |
| C | $500,000 | $10.00 | 1.50 | $75,000 |
- Company B, with good loss history, is required to pay only half the annual premium paid by Company C, which has poor loss history.
- Company B even pays 25% less than Company A, the new company with no loss history.
- This lower premium cost gives Company B a considerable advantage over the other two firms when all three compete for the same contracts or customers.
Penalty Costs - OSHA Citations
The penalties for safety and health violations found by OSHA inspectors have increased seven-fold since 1991. Serious violations, such as lack of adequate fall protection or lack of adequate confined space entry procedures, used to have a maximum penalty of $1,000 for each violation. Under the current penalty structure, these same violations could cost up to $7,000 each.
A serious repeat violation within 3 years of the initial violation carried a maximum penalty of $10,000 in 1991. Now, the same repeat violation could cost up to $70,000. Jail terms are also possible for supervisory personnel in very serious cases such as a willful violation that caused an employee death.
| OSHA Fine | Profit Margin | ||
| or Indirect Claim Cost | 2% | 5% | 10% |
| $1,000 | $50,000 | $20,000 | $10,000 |
| $5,000 | $250,000 | $100,000 | $50,000 |
| $7,000 | $350,000 | $140,000 | $70,000 |
Direct Costs - Insurance Coverage
Unless your company is self-insured for workers' compensation, an insurance policy has been purchased through a insurance company . In exchange for the "premium" paid to your insurer, benefits are paid to claimants when a work-related injury claim has been filed and accepted. These benefits represent most of the direct or "insured" costs of an employee injury. The majority of direct costs paid by your insurer fall into three basic areas:
- Payment of bills associated with treatment, which can include visits to the doctor, physical therapy, diagnostic tests, and prescriptions.
- Payment of temporary wage replacement, or "time loss benefits," to the injured employee during the time he or she is unable to work.
- Payment of permanent impairment awards in the event that the injury causes a permanent disability. In the event of a death, payment for death benefits to qualified beneficiaries may be applicable.
Indirect Costs - Hidden But Real
What you see in direct cost is actually much less than the true costs. Direct costs are only the tip of the iceberg. You may not be aware that indirect or hidden costs of accidents and injuries are not covered by your workers' compensation insurance policy. The indirect costs are estimated to be at least four times higher than the insured costs. Indirect costs vary, depending upon the industry and the nature of the accident, but here are a few of the most common expenses:
A) Uninsured costs related to the injured employee:
- Employee time away from work on the day of the injury or illness for initial treatment;
- Cost of first aid supplies or in-house treatment providers;
- Employee time away from work for subsequent treatments as necessary;
- Any payments made to the employee during the waiting period before wage replacement benefits begin (note: Some jurisdictions require a waiting period.);
- Any supplementary wage payments made to the employee in addition to time loss compensation.
B) Uninsured supervisory costs:
- Your wages during the time you assist the injured worker;
- Your wages during the time you investigate the incident, and fill out the necessary paperwork;
- The time you spend training a replacement or rescheduling work assignments.
C) Uninsured costs related to non-injured workers:
- Time away from work tasks by employees who assist the injured party, including transportation to and from a treatment facility, if applicable;
- Employee time away from work tasks while observing the incident scene;
- Clean up operations related to the incident;
- Loss of employee productivity due to disrupted work flow;
- Unplanned overtime costs which becomes necessary as a result of the incident;
- Salary of administrative employees who process claims reporting paperwork.
D) Uninsured equipment and tool damage:
- The cost of repairing a damaged machine, or providing an interim or replacement machine or equipment, if needed.
The Bottom Line - Less Pain & More Profit
Many of the costs to operate a business are relatively fixed in nature, such as pay-outs for labor and raw materials. Workers' compensation insurance costs are variable, and depend greatly on the quality of your safety management system. OSHA citation fines are avoidable if your company is in compliance with OSHA standards, which also depends upon your safety management system.
All of these costs affect your firm's bottom line, and can be controlled if you give accident prevention the same priority as production. If you keep your overhead expenses lower than others in your industry, you can be more competitive in obtaining work. Companies that do not control these costs will likely be out of business soon.
In addition, all employees value a safe workplace and the management team that provides it. An effective Injury and Illness Prevention Program is essential to the success of your company. As a supervisor, both the morale of your crew members and your company's profit margin depend greatly on how well you participate in the safety program. Ask yourself-Do you support your safety program by:
- Conducting a thorough safety orientation with all new employees?
- Holding regular tool-box safety meetings with your crew?
- Enforcing safety rules, policies, and procedures?
- Conducting inspections so that new or previously missed hazards are identified and corrected?
- Investigating accidents and near misses so that methods for preventing recurrence are identified?
- Encouraging employees to report hazards, near misses, and accidents immediately?
- Providing modified duties so injured employees return to productive work as soon as possible?
- Providing employees with the necessary training to perform their jobs safely?
Supervisors, Safety, Productivity, and Profit
Work Together!
Work Together!