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When I talk to potential new clients for our
consulting services, many times they are primarily interested in complying with
the various OSHA regulations. While complying with the OSHA standards is an
important objective in safety, this should not be the main focus of a Safety
Program. The chance of a small company being inspected by OSHA is not great. If
this does happen, the penalties are usually mitigated by the size of the
company.
The real importance of a Safety Program should be
focused instead on protecting the company’s employees, equipment and property to
reduce the financial consequences that could be caused by an unexpected accident
or accidents. With the implementation of Group Rating in 1990, this has made it
even more critical to small companies. Group Rating allows small to medium size
companies to join together in like industry classes to take advantage of a
significant savings in Workers’ Compensation Premiums.
Prior to 1990, small companies could only receive
limited savings on the premiums even if they never had a claim. This was based
on a formula used by the Bureau of Workers’ Compensation that is designed to
protect small companies from large impact claims. This is called Credibility.
Based on the size of your company, the amount of a single loss from a particular
claim is limited and the total cost impact is limited. Claim costs exceeding the
formula are absorbed by the Bureau of Workers’ Compensation. Unfortunately, this
is also used in reverse and it restricts the amount of possible savings to
companies having good experience.
Group rating now allows companies to save
significantly more on their Workers’ Compensation Premiums. However, the amount
of savings possible is based on the group’s collective strength and the
individual experience of each member in the group. The better the experience,
the higher the savings potential. That is why only companies with good claim
history are accepted into a group, and those with poor claim experience are
either asked to leave the group or put into a program with reduced savings.
Unfortunately, not all companies that are accepted
into a group do all the things necessary from a safety standpoint to stay in the
Group. These companies put at risk their ability to remain a part of the Group
and the cost difference can be dramatic. Take two companies both expected to pay
$10,000 a year in Workers’ Compensation Premiums. One qualifies for the Group
and saves 60%. Therefore, the Workers’ Compensation cost for that company will
only be $4,000 per year. The other company has poor claim experience and is 50%
penalty rated. Their annual Workers’ Compensation cost will be $15,000. The
difference in cost is $11,000 a year.
These are the Direct Costs that can be easily
measured. Direct costs are those paid in Workers’ Compensation Premiums that the
Bureau of Workers’ Compensation then uses to pay Medical Costs, Weekly
Disability Payments and other costs either to an injured employee or on behalf
of the injured employee. The Direct Costs, however, are not the only cost
incurred; there are hidden costs. These are known as Indirect Cost. These are
incurred if claims are taking place. Insurance Companies have determined that
these indirect costs can be from four to ten times the direct costs. These cost
include the following:
- Down time or interruption in company business
activity due to an accident
- Additional wages if a replacement employee must be
hired
- Overtime expenses
- Additional man production management time as a
result of an accident
- Equipment damages
- Quality problems
- Additional training costs
- Work slowdown
- Possible lost sales
- Other miscellaneous expenses
The Direct Cost and Indirect Cost have to be added
together to determine the Total Cost Impact to the company. Take the company
above who is penalty
rated. Since they are incurring claims, they will also be incurring indirect
costs. If you simply double the annual Workers’ Compensation Cost, this
company will be incurring a Total Cost Impact of $30,000 per year. The other
company that is in the Group and is not experiencing any claims does not
have any Indirect Cost. The $26,000 difference in cost is known as
Non-Contributory Cost since these are costs that do not have to be paid if the
claims
are not being incurred. They also do not contribute to the company’s effort to
be successful, make a profit and grow. These extra costs come directly out
of the company’s profits.
The differences can be seen even more dramatically if you look at the sales
dollars required to generate the extra $26,000. If the company is generating a
10% net profit from their annual operations, it would take an additional
$260,000 in annual sales. If the company is doing $1,000,000 in annual sales,
this
would mean that 26% of the total company sales would be tied up in paying
unnecessary Workers’ Compensation Cost. If the profit margin is only 7%, the
impact goes up to $371,280 and at 5% net profit, the impact becomes $520,000.
This is why Workers’ Compensation Costs can either be the difference in
a company being successful and/or going out of business.
When you look at your internal safety efforts, ask yourself, “Have I done all
the things necessary to ensure our company can stay in the group?” If not, you
should evaluate your current efforts and, where necessary, start working on
these areas that should be improved. Remember the old saying, an ounce of
prevention can be worth thousands of dollars in wasted profits. Also, it takes
most companies four years to become eligible for entrance into a Group if
they have poor claims experience. Simply put, the choice is yours. Safety pays
and certainly impacts a company’s profitability, success and potential
growth.
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