In this article we’ll describe the two types of costs associated with workers’ comp claims—direct and indirect. But first, let’s go over some basics about workers’ comp.
Workers’ Comp Protects the Employer (And Employee)
Workers’ comp protects you, the employer, by covering an employee’s medical costs and lost wages if they are injured. You don’t need to pay an employee receiving workers’ comp benefits if they aren’t at work. If they are still working for you, then you would need to pay them their regular pay rate. In this case, workers’ comp would most likely just be covering their medical benefits, and not lost wages.
As long as your policy is active, your insurer—not you—will pay the cost of an injured employee’s medical treatment, disability, and other benefits. You might be wondering, why then, do some businesses fight workers’ comp claims? They fear that a workers’ comp claim could make their premiums increase. It’s like your auto insurance premium, which always seems to go up every time you file a claim. While providers do look at loss history when figuring out your premiums, fighting a workers’ comp claim will only encourage your injured worker to hire an attorney. Once a lawyer gets involved, your costs will go up exponentially. According to a recent study, workers’ comp claims that involve an attorney can be 388 percent more expensive than those that don’t. As you can see, fighting workers’ comp claims is a losing battle.
Now let’s get into the nitty gritty about how much these claims actually cost you.
Direct and Indirect Costs of Claims
Workers’ compensation claims generate two types of costs: direct and indirect. Direct costs are easy to identify and tabulate. For most businesses, the direct cost is the workers’ compensation premium. The employer pays a premium for insurance coverage and in return, the insurer pays for the workers’ compensation benefits injured employees are eligible to receive under state law. These may include medical care, disability benefits, rehabilitation, and death benefits. The insurer also pays any legal fees associated with covered claims. Disability benefits reimburse injured workers for a portion (typically about two-thirds) of the wages they lose while they’re unable to work. Employers are not required to pay wages to injured workers who are receiving these disability payments.
In contrast to direct costs, indirect costs can be difficult to identify and quantify. While they may not be easy to spot, indirect costs can be substantial. For many types of workplace injuries, indirect costs can exceed direct costs. Here are seven types of indirect costs that can result from a single workers’ comp claim.
1. Administrative Costs
Probably the most immediate effect of a workers’ comp claim on your business is an added burden on your supervisory and administrative staff. A work-related injury creates many immediate tasks. One or more of your staff must drive the worker to a clinic or hospital for immediate treatment, provide the worker a claim form, and submit a completed First Report of Injury form to your insurance company. Your staff will need to communicate with people at your company and the worker’s medical provider throughout the worker’s recovery. If the employee is cleared to return to the workplace with restrictions, such as no lifting over five pounds, your staff may need to look for alternative work. These tasks can take an enormous amount of time and effort, and as all business owners know, time is money.
2. Higher Payroll Costs
According to the Bureau of Labor Statistics, about 2.8 million American workers sustained a non-fatal injury in the workplace in 2019 and almost a third of them missed at least one day of work. When an injured employee is unable to work, someone else must perform their job. You can hire a temporary worker to fill in or ask or ask existing workers to perform the injured worker’s job, possibly paying overtime. If the injured employee is out for an extended period of time, you may need to hire and train a new employee. All of these options have costs.
3. Higher Cost of Insurance
Workers’ comp insurance claims can raise your insurance cost because they're used in experience modification. An experience modifier is a mathematical factor applied to your insurance premium that can increase or decrease your premium.
Your modifier reflects your loss experience during the previous three years (not including the current policy term or the one before that) compared to the loss experience of other businesses in your industry. It’s expressed as a number that may be greater than, less than, or equal to one. If your loss experience is better than the average for your industry, your modifier should be less than one, and you’ll receive a credit on your workers’ compensation premium. The reverse is also true. Worse than average loss experience will result in a debit on your premium.
For example, suppose you operate a landscaping business. Your workers’ compensation premium is $20,000 before your experience modifier is applied. Here’s how your modifier can affect your workers’ comp premium.
In the first example, your loss experience is average for your industry, so your modifier does not affect your premium. In the second example, your loss experience is worse than the industry average, so you pay an extra $4,000 in premium. In the third example, your loss experience is better than average, so you’re rewarded by paying $4,000 less.
The experience rating formula puts more weight on small losses, which are more predictable and easier to prevent than large ones. This means that many small losses will impact your experience modifier to a greater extent than a single large loss. Suppose that two businesses have similar operations and both have an annual workers’ comp premium of $20,000. Company A has incurred a single $10,000 loss during the experience rating period while Company B has sustained five separate losses at $2,000 each. While the total losses for the two companies are the same ($20,000), Company B’s experience modifier will be higher than Company A’s, and Company B will pay more for insurance.
4. Employee Morale and Productivity
Workplace accidents can upset workers, lowering morale and increasing absenteeism. Even a minor incident can disrupt your operations and reduce your productivity. When an accident occurs, work may need to be stopped or delayed until damaged equipment can be repaired or replaced. An occupational injury can make workers fearful and angry, especially if they think you aren’t concerned about the accident or their welfare. They may also resent having to pick up the slack for an injured employee who’s out on disability.
5. Extra Scrutiny from Your Insurer
Another potential effect of workers’ comp claims on your business is unwanted scrutiny from your insurance carrier. Insurers monitor policyholders’ claims experience and will sit up and take notice if an insured business sustains a large claim or a series of small claims. They’ll analyze the circumstances of the accidents that triggered the claims, looking for indications of safety lapses on the part of the employer. If your insurer suspects safety is an issue at your workplace, it may conduct an on-site workers’ comp inspection. An inspection will likely result in a list of corrective actions you must take to keep your coverage with your insurer. For instance, your insurer may require you to install machine guarding on equipment, improve housekeeping, or educate your workers about the risks of handling hazardous materials.
6. OSHA Inspection and Fines
A serious workplace injury can trigger an OSHA investigation and even a fine. Your chances of an investigation increase if OSHA has received complaints from your workers about workplace hazards. Depending on the circumstances, OSHA may investigate your business over the phone or conduct an on-site inspection. If an on-site inspection turns up serious violations of OSHA standards, your business may be cited or fined up to $13,653 per day.
7. Damage to Your Reputation
Another possible effect of workers’ compensation claims on your business is damage to your reputation. Thanks to the internet, posts on social media about workplace accidents can quickly travel far and wide. Suddenly, your business may be viewed as a risky place to work. Stories about on-the-job injuries can discourage prospective employees from working at your firm. They can also dissuade customers, clients, investors, suppliers, etc. from doing business with your company.
How to Reduce Your Costs and Lower Your Premium
The costs of workers’ comp claims can have a major impact on a firm’s profitability. You can see how these costs might affect your business by using OSHA’s $afety Pays calculating tool. First, go to the website and choose one of the injuries from the drop-down list. Next, enter your profit margin (or use the 3 percent default) and the number of injuries (the default is one). The tool estimates your direct, indirect, and total costs of the injury. It also calculates the additional sales your business would need to generate to cover those costs. For example, here’s what you get if you select “concussion” from the drop-down list:
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