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The financial side of worker’s compensation

David Leix for Progressive Forage Published on 01 January 2018

A fundamental goal to a successful harvest season is that “everyone goes home at the end of the day – whole, healthy and ideally in better shape and condition than at the start of their work day.” There is also a very real financial side to a successful and safe harvest. Prevention of accidents and their resultant injury and illness reduces your annual worker’s compensation bill.

Worker’s compensation and the EMR

Worker’s compensation (WC) is a typically misunderstood item for employees and employers. The program was created after labor and management agreed to the “grand bargain.” In exchange for a business carrying workplace injury insurance, employers receive protections against lawsuits that are often long, drawn out and expensive legal proceedings.

In exchange, employees have their injuries covered, regardless of fault, with a predictable schedule of health and wage benefits. Both parties share the benefits to timely, efficient resolution in the event of unfortunate accident and injury events.

For the most part, companies’ worker’s compensation costs are determined by the classification of work and how much payroll is associated with that work. One of the benefits built into the system is to financially reward companies that have a safe work history for their employees, with an emphasis placed on how much lost time, claims and frequency a company experiences. This is accomplished through a company’s experience modification rate factor (EMR).

A standard or manual industry average EMR is 1.00. Companies with good (better than industry average accident experience) injury and illness costs “earn” themselves an EMR “credit” (less than 1.00). Conversely, companies with poor or “adverse” accident experience, resulting in increased injury and illness costs, earn themselves a “debit” EMR (greater than 1.00).

The percentage (or points) above or below one’s theoretical 1.00 EMR determines one’s ultimate annual worker’s compensation premium costs (Figure 1).

The modification factor

If two similar companies with otherwise equal payrolls and worker’s compensation payroll classifications/rates have varying degrees of safety programs resulting in an accident experience with a variance of plus or minus 0.25 EMR points on either side of 1.00, one company would receive a 25 percent discount on premium rates, while the other would receive a 25 percent increase. At the end of the day, this is serious savings for safe employers.

One’s WC loss experience over the most recent last four-year complete policy periods is used to determine one’s current year EMR with the most recently completed policy period’s loss experience excluded, pending the resolution of “open” WC claims (and sometimes “green” WC claims reserves costs).

Thus, one bad or adverse WC loss year will cost the company three years over in determining one’s EMR factor. Multiple adverse WC loss years will delay improving one’s EMR factor accordingly, over the long haul, until the adverse year(s) work themselves out of the three-year averages formula. But this also works in a company’s benefit with safe years.

Safety return on investment

Again, no one wants to see a valued worker injured. Another way to look at your commitment and “investment in safety, safety training and education investment” is to consider the time-honored return on investment (ROI) financial tool (Figure 2).

Sales required to cover accident costs

From the Occupational Safety and Health Administration’s (OSHA) website $afety Pays, if a company is expecting a 2 percent profit margin from harvest yields, a $5,000 accident will require a company to sell $250,000 more of commodities or product to just break even.

Divide that $250,000 by the current market price for a bushel of corn or soybeans, or a ton of hay to determine how much physical product you must grow, harvest and sell just to break even for an accident’s costs.

Figure 2 only reflects the “direct” accident and injury costs, i.e., medical and indemnity/wage costs. Much like an iceberg, the “indirect” accident costs are typically more substantial than the direct costs. The indirect accident costs multiplier will vary depending on an employer’s unique circumstances. These estimates include, but are not limited to, the following kinds of indirect costs:

  • Any wages paid to injured workers for absences not covered by worker’s compensation

  • The wage costs related to time lost through work stoppage associated with the worker injury

  • The overtime costs necessitated by the injury

  • Administrative time spent by supervisors, safety personnel and clerical workers after an injury

  • Training costs for a replacement worker

  • Lost productivity related to work rescheduling, new employee training and learning curves, and accommodation of injured employees

  • Cleanup, repair and replacement costs of damaged material, machinery and property

Some of the possible kinds of indirect costs not included in these estimates may also include:

  • The costs of OSHA fines and any associated regulatory legal actions

  • Third-party liability and legal costs

  • Worker pain and suffering

  • Loss of good will from bad publicity

OSHA’s $afety Pays uses the sliding scale (Table 1) to calculate the indirect costs of the injuries and illness.

OSHA's "Safety Pays" sliding scale calculates the indirect costs of injuries and illness

Thus, the cost of a $5,000 accident will actually cost more than double when the indirect costs are factored in ($5,000 x 1.2 = $6,000; thus, $5,000 direct costs + $6,000 indirect costs = $11,000 total accident costs).

Preventing the accident

Accident and injury prevention is key and offers the best safety return on investment. An accident or injury prevented saves everyone and does not negatively impact a company’s bottom line.

Always take the time to safely, fully review and use Job Safety Analysis (JSA) to plan work tasks at their basic levels, to identify risk and potential sources for accidents and injuries.

Fatigue is always a factor during the time-sensitive, long harvest season. Make sure all are well-rested, hydrated and take regular necessary work breaks. Alcohol and illegal drug use have no place in the work environment and should not be tolerated.

Utilize various state and federal safety and health resources that are available, free of charge. State ag extension offices and agents also offer many good safety resources. Your local co-op may also have safety resources available. Also, utilize your insurance agent/broker and underwriting carrier’s safety and loss control consultants, resources, services and expertise.

As with any safety training, documenting your training is a must. The old adage applies: “If it’s not documented, it never happened,” especially if the potential scrutiny of OSHA, state, county, law enforcement or similar regulatory agencies should warrant an investigation.

Minimally, an employee safety meeting sign-in sheet briefly summarizing the scope and depth of your safety training or a safety policy/rules acknowledgement checklist are used. A brief five- to 10-question depth of knowledge, true or false or multiple choice quiz emphasizing the key training takeaways is often used as a best safety practice.

Equipment owner’s manuals, web resources and various other excellent free safety web resources are available to help with your safety training efforts and documentation.

Have a safe day!  end mark

As a certified safety professional (CSP), Dave Leix brings 40-plus years of safety and health experience to clients while serving in private industry and as a field loss control consultant/risk manager for several prominent national property casualty insurance companies before joining the State of Wisconsin Department of Workforce Development (DWD) – Worker’s Compensation Division. Email David Leix or call (608) 266-4541.

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