The Real Cost of Workers’ Compensation

Workers' compensation insurance is designed to help employees continue receiving wages and medical benefits if they become ill or injured on the job. In exchange, the employee agrees to hold harmless their employer, relinquishing any employee right to sue their employer for “tort negligence” to recover wages and medical expenses, as a result of the job-related injury or illness. So what is the actual cost to the employer for providing (state-required) workers’ compensation benefits?

Employers, particularly small businesses, are very cognizant about reducing costs within the organization. Sometimes, however, this is at the expense of the employees’ work environment. Hazards may not be apparent. They can be as simple as not communicating employees’ safety procedures or displaying informative state labor law posters, or by providing worn out, outdated, or non-ergonomic furniture or equipment. The resulting cost for employer negligence is often not considered or detected until after an employee’s injury, accident, illness, or death has occurred. A claim increases costs, as well as company misery, that could have been mitigated.

US workers' compensation varies state to state. Most employers, depending on the size of their company (number of employees), are required by their state to subscribe to a workers’ compensation insurance program provided by private insurance companies. Employees of the federal government are covered under the federal government’s own plan. A few states operate their own workers’ compensation fund for their state employees as well. Most states have some private insurance participation plan, while others elect to “opt-out”. These “nonsubscribers” are still required to have adequate insurance to cover workplace injuries/fatalities, however.

The monetary cost of workers’ compensation insurance coverage fluctuates according to the riskiness of the employer’s business or industry, as well as the employer’s historical safety record and claims, in-place health and safety policies, and employee health insurance program(s). The base rate is typically determined (in nearly every state) according to the individual worker’s classification, multiplied by one-percent per $100 of the worker’s total payroll. A roofing company’s rate for example, would generally be higher than that for a computer business. Further, the individual calculated rate for the roofing company’s office administrator would typically be less than the rate to cover one of its roofers.

However, the real cost of workers’ compensation may be considered the result of employers failing to maintain a safe workplace. A study co-authored by Harvard Business School professor, Mike Toffel, finds that enforced workplace health and safety rules not only “save lives without sapping a company's bottom line,” but can increase the company’s investments, and ultimately it’s value. It does this by reducing lost employee production time and compensation and claim payouts for injuries and illnesses caused by an unsafe workplace. Researched companies that were in compliance with OSHA standards for workplace safety generally reported as much as 9.4% fewer accident/injury claims without having any “negative impact on profits or sales.”

Conversely, companies that do not provide safe workplace environments can be cited by OSHA inspectors and be fined $1,000 (on average) per violation. This includes failure to display, or incorrect display of, federal and state labor law poster(s). A maximum fine of $7,000.00 for each serious violation, such as missing elevated walkway handrails may also be assessed in addition to more minor violations.

Correcting these violations and providing a safer, healthier workplace directly reduces the cost per violation, expense to correct each violation, and overall cost of workers’ compensation claims and payouts. The indirect cost benefit from complying with OSHA health and safety regulations is an environment that encourages production and output.

The real cost of workers’ compensation then, is a complex multiple of safety, communication, and compliance. All of these contribute to either the efficient employees and cost reduction for the company, or to a cost increase due to fines, claims, and necessary compliance upgrades.

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