What Makes Occupational Safety a Good Business Investment?

What Makes Occupational Safety a Good Business Investment?

Todd William Loushine, Ph.D., P.E., CSP, CIH

Todd William Loushine, Ph.D., P.E., CSP, CIH

Associate Professor of Occupational & Environmental Safety & Health

Serendipitously entered the occupational safety and health field in 1994 because Minnesota OSHA draws interview candidates from the same list as the Pollution Control Agency. LOVED working as a CSHO and learning/practicing OSH from OSHA's perspective. During that time, I also spent a year as a product manager/subject expert for air filtration line of equipment. In 2001, up-rooted my family to attend graduate school at UW-Madison. While in graduate school, was fortunate to be working part-time as a risk manager at the WI Dept of Health and Family Services (primarily performing OSH duties for mental health and long-term care facilities throughout WI). Upon completing of my PhD in August 2007, started my first faculty position at the University of Minnesota Duluth. In 2010, took advantage of an opportunity to return to Southern Wisconsin and now work at the University of Wisconsin-Whitewater. I am very involved with the American Society of Safety Engineers (ASSE) and the Wisconsin Safety Council. I'm always looking to expand my professional network and assist others in the OSH field.

From a business perspective, safety programs do not actually generate sales or income and therefore are a financial burden or cost to do business. The cost of a safety program varies greatly but includes compensation and benefits for safety staff members, safety program budget (including audit equipment and costs associated for training), and of course workers compensation premiums. Author J.E. LaBelle published a cost “worksheet” for direct and indirect incident costs in the April 2000 issue of Professional Safety. According to Fred Manuele (Jan. 2001 issue of Professional Safety) and OSHA (S&H Management Systems eTool – Costs of Accidents) the ratio of Indirect to Direct costs associated with accidents varies depending on the direct cost. 

OSHA's Ratio of Indirect to Direct Costs

Liberty Mutual conducted a survey and found that 95% of business executives perceived that safety programs had a positive impact on the company, and 40% of those surveyed perceived that for every $1 paid in direct injury costs there were $3 to $5 of indirect costs.

The cost of producing a product or delivering a service includes all the safety program costs, thereby either increasing the cost of the product or service, or lessening the profit margin. Safety professionals believe that the cost of a loss event (i.e. injury, illness, death, theft, or failure of equipment) is much greater than the cost of the safety program, therefore safety is cost-effective. But where’s the evidence? Do companies really receive a return on every dollar spent on their safety program? 

Here’s the undeniable truth: Not all safety programs are the same. The same goes for the people that create and administer those programs. The critical factor in the success and value of a safety program (or safety professional) is how the organization perceives safety and how safety is integrated into the work system. 

There are two common methods for assessing the value of safety: (1) through the prevention of compliance citations and penalties, and (2) the minimization of workers compensation claims and annual premiums. There are additional sources of cost-savings, such as prevention of work stoppage and law suits, so let’s review safety related costs.

Avoiding Penalties from OSHA Compliance Inspections

OSHA has a new page under their “Data & Statistics” tab that allows the user to search by state for enforcement cases that resulted in initial penalties above $40,000. For FY 2015, there are 711 such cases (that’s about 0.9% of the total enforcement cases from FY 2015). 
In fact, the top 5 highest initial penalties were:

  1. $1.792M
  2. $1.766M 
  3. $963k
  4. $861.5k 
  5. $560k

Over 400 of these 711 are below $70k, which demonstrates that the highly publicized exorbitant cases are actually quite rare. 

It is likely that in 2016 OSHA penalties are going to increase substantially (estimated by 80%) from the current maximum of $7,000 for a serious violation and $70,000 for a willful violation. The increase is due to President Obama’s budget proposal that removed the Federal Civil Penalties Inflation Adjustment Act of 1990 (which exempted federal agencies from increasing violation penalties in accordance with U.S. inflation rates). This means by mid-summer, a serious violation could result in a maximum penalty of $12,600 and a willful violation could cost an employer $126,000. 

Although these penalty amounts are substantial, it can be estimated that with average of 2 citations proposed per inspection, the likelihood is that one is serious and one is other-than-serious. Therefore, if your company is doing a decent job at conducting hazard audits and supplementing hazard controls with training and proper safety program documentation, it’s unlikely that initial penalties will be above $10,000 for a compliance visit.

According to OSHA.GOV, nearly 80,000 OSHA compliance inspections were conducted in fiscal year 2015 (which is down from 90,000, the average annual number of compliance inspections from 2002-2007). Assuming there are approximately 8 million workplaces in the U.S. means that approximately 1% of workplaces are inspected each year either due to employee complaints or OSHA’s national emphasis program of planned inspections. Which means unless your company falls under a current national or state emphasis program, or you have an employee complaint filed, the likelihood of seeing a compliance officer is less than 1 in 100. And it’s unlikely that the annual average of inspections will change due to anticipated flat funding for the nation’s top enforcer of workplace safety and health laws.

There is a little known study that was published in 1971 by the state of Wisconsin Department of Industry, Labor and Human Relations that assessed the effectiveness of compliance audits against actual injuries experienced in companies. The study reported that although compliance audits were a reliable methodology for identifying “persistent physical hazards” (a.k.a. unsafe conditions) that actual injury reports indicated that 75% of claims were due to “momentary (non-persistent) physical hazards and behavioral problems (a.k.a. unsafe acts). 

In fact, the study determined that approximately 45% of the reported injury claims were due to unsafe acts or behaviors that would not be identified through a compliance audit. The researchers determined that a variety of auditing methodologies were needed to gain a better understanding of the safety program’s effectiveness and to prioritize program improvements. This study was published almost 45 years ago yet current compliance (visual hazard) auditing remains mostly unchanged. In order to better understand the true costs of injuries, we need to understand workers compensation policies and records. 

Minimizing Workers Compensation Claims and Annual Premiums

Workers compensation claims, as a loss/run report, provide a good representation for cost of injuries and illnesses in a company, and industry-wide reports show the average costs of a wide range of occupational injuries. Workers compensation standards are state-based laws requiring businesses to insure that workers will receive adequate benefits if harmed while in the course of work (some states, like Texas, are changing their W.C. laws that limit this requirement). Although work comp laws may seem similar from state to state, the difference is in the payment allowances and amounts. If a business is found to be operating without proper work comp documentation, they can be fined for each day they were in business without coverage. Workers compensation insurance policies can be purchased through licensed carriers or third-party brokers. Companies can also file with their state work comp agency for self-insured status, which basically means that company has the assets to cover their worker injury liabilities. Some self-insured companies also purchase a "stop-loss" policy to protect against catastrophic occurrences.

The base premium for a workers compensation policy is a tabulation of state rates per employment code multiplied by “per $100 in payroll”. The schedule of rates per employment code are set by state workers compensation bureaus, typically based on claim history for that code. The final premium amounts are adjusted by either an underwriter’s assessment and/or the company’s claim experience over a rolling three-year period (not including current or previous year claims as they have a higher ratio of open claims). It should be noted that they type of claim (medical only vs. wage benefits paid) affect the adjustment factor, formally called the “experience modification rating”, “EMR” or simply the “mod”. Meaning, a company can measure the value of investments that are preventative and responsive. 

Companies that truly care for their employees ensure that injured employees are not “blamed” for getting injured. Active and caring post-injury treatment program is essential to physical and mental recovery from injuries. An innovative return to work program can minimize time away from work or possibly keep claims in the “medical only” status. In simple terms, a policy writer has projected claim frequency and severity for a company and if over that rolling three-year period the company files less claims then their EMR can be reduced. On the other hand, if the company files more claims than expected then their EMR can be increased. Depending on the amount of a company’s base premium, a reduction of EMR by 0.1 can result in substantial savings that year. In addition, companies who have a proven effective safety program may receive dividend sharing from their carrier to keep them as a valued customer. A company with minimal claim frequency and severity can enjoy a minimal cost of business consideration for their safety program over competitors who have not achieved that level of safety program effectiveness. 

From a financial perspective, this is where companies can measure, track, and promote investment into their safety program. Although the return on that investment may take several years to affect the annual financial statements, once the company has adopted the right mindset, approach, and investment into their safety program, it becomes a value of the company.

The Good Investment in Safety 

Although this may be difficult to understand - in order to truly achieve an effective safety program and experience the true value of investing in safety, you need to look beyond the costs/savings and the compliance/case management aspects of occupational safety

The value of safety comes from supervisors and workers believing that management values their input and effort, and if something goes “wrong” that they won’t be blamed, but rather assisted to make thing better. Too often safety professionals speak of a strong safety culture, which alone is a fallacy. Every organization has global and local elements of culture which results from the perceptions of supervisors and workers on what they believe is expected of them, and the equity they perceive in their treatment and compensation. Management needs to relinquish the assumption that they know how the work system is truly functioning or how workers feel. Management needs to expect that there will be errors or discrepancies in the design of work, interactions between people, and application of work behaviors. Some errors and discrepancies will not result in loss, but some will. The key to understanding the true sources of loss is by removing the need to “blame” and to view work as a complex and non-persistent system. The goal of a safety program should be continuous improvement of the work system, at any cost, to minimize sources of risk and loss.

The foundation of this approach is fostering positive relationships and communication between workers, supervisors, and management, allowing everyone to be successful in their assigned duty. When workers and supervisors are allowed to achieve success in their work, and safety is part of that recipe, then no matter the investment, the cost of business is what it should be and the business should thrive.