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When workers' comp can cripple-or recover-your business

By Linda Lutgen, CIC, CISR, CFG Insurance Services, Inc.

To illustrate the importance of managing your workers' compensation costs, consider the case of one employer who turned its entire business around based solely on its workers' compensation practices. It was a zinc and aluminum die casting company. Losses were averaging $232,000 per year from 1991 to 1996, threatening both the profitability and the survival of the 335-employee business (HR manager Jay Scully related the story publicly during the recent Society for Human Resources Management Conference). Scully said, "Workers' compensation costs of this magnitude were crippling the company. We had some horrendous years when costs exceeded $500,000. If we continued to run the same losses that we had in the early 1990s, there's a real chance the company could have died."

How did they begin the turn-around? By implementing a rigorous workplace safety program, combined with aggressive return-to-work policies. In doing so, they pushed average costs down to $29,500 per year from 1996 through 2000.

Confront opposition right away

For a while, it appeared as though employers nationwide discovered the two big weapons for battling workers' comp costs: safety and return-to-work programs. Workers' comp benefits cost employers $1.03 for every $100 in wages in 2000, a 39 percent decline from peak costs of $1.68 measured in 1992, according to an analysis by the National Academy of Social Insurance (NASI).

But the success of any program hinges on management buy-in. Supervisors must understand that the way they handle safety issues and workplace injuries can mean the difference between profit and loss for the organization.

In Scully's organization, he found that employees on one night shift had a disproportionate share of accidents, so the company decided to incorporate safety goals, and lost-time days into the supervisors' yearly evaluations, with direct ties to annual raises and bonuses.

Any new initiative will find opposition with some supervisors, and it's crucial to address these issues up front. In Scully's organization, some supervisors didn't like the new policies. "They didn't understand the relationship between safety and profitability," Scully said. "They are no longer there."

The tide turns again

Even though many employers have learned from their mistakes and implemented safety and return-to-work programs, the dramatic decline in workers' comp costs in 2000 has started to climb again. How can this be? Insurers are partially responsible for passing on rising costs and payouts, but other forces are at work as well.

There must be alternate reasons why workers' comp rates rise, in spite of having the appropriate safety and return-to-work programs in place. Whatever the cause, however, employers should continue to focus on preventing injury, managing injury cases, and facilitating return to work, since these practices will continue to make a difference.

Alternate reasons for rising workers' comp rates

It's an almost universal experience among employers: when workers are laid off, workers' comp claims increase. In our down economy, when layoffs are common, it's important for employers to confront both the truth and the fiction of injuries during times of job insecurity. Otherwise your workers' comp expenses will rise.

When workers fear they might lose their jobs, they:

1. Exhibit a lower level of knowledge about appropriate safety behaviors.
2. Demonstrate less motivation to comply with organizational safety policies.

The two observations above are not only common wisdom among employers; they are also the findings of a study in the Journal of Occupational Health Psychology called "The Effects of Job Insecurity on Employee Safety Outcomes."

The study paints a much clearer picture of the lay-off-injury link, and suggests more specific causes. Even more significant: decreased safety motivation and compliance relates to higher levels of workplace injuries and accidents. As a result, employers need to recognize that "job insecurity can have potentially dangerous implications for employee safety attitudes and behaviors," the report states.

What actions should employers take?

First, spend more time on training and-most importantly-safety awareness and motivational activities when the level of job insecurity is rising. Also, get senior management to consider the impact layoffs might have on worker safety before layoffs begin. They need to recognize that when jobs are threatened, employees often feel pressure to cut safety corners to keep their production numbers up to try to keep their jobs.

In other words, layoffs implicitly send workers the message that safety is taking a backseat to production. Companies must counter this message (even if there is truth to it) if they want to keep a lid on injuries during layoffs.

When downsizing, companies should:

• Maintain or expand existing reward programs for safe behaviors. Job insecurity decreases safety motivation, but not as much if you actively reward employees for safe behavior.
• Increase the number of safety messages employees receive. (For example, use a "safety first" reminder from senior management as a paycheck insert.)
• Provide safety training to accompany job changes. Layoffs make it likely that remaining employees will inherit additional job duties. Make sure these workers receive the instruction they need to safely perform their new duties.
• Assess the level of safety monitoring. Make time for monitoring safety compliance, maintaining or increasing safety knowledge, and keeping workers "safety-motivated" during times of downsizing.
• And, continuously evaluate whether the drain on institutional knowledge is affecting safety.

Managing workers' comp costs is big business today. By being aware of any possible pitfalls and planning ahead, you have a better chance of controlling rising premiums.

Reprinted with permission: CFG Insurance 2003