The Economics of Safety

Gary Auman

Gary Auman (www.dmfdayton.com) is a Partner in the law firm of Dunlevey, Mahan & Furry in Dayton, Ohio. He graduated with an electrical engineering degree from the University of Louisville in 1969, and a law degree from The Ohio State University in 1976. Since then, his practice has focused on defending employers in workers’ compensation and OSHA cases. In 2002, Mr. Auman was awarded the Distinguished Service to Safety Award by the National Safety Council. He has worked with OSHA in its development of safety and health standards, and he has defended OSHA cases in several federal appellate courts. Mr. Auman also represents 4 national and regional trade associations in the construction industry. He can be reached at gwa@dmfdayton.com.

October 1, 2008

The readers of Insulation Outlook are usually involved in some facet of the commercial, industrial, or mechanical insulation business, whether manufacturing, installing, specifying, or evaluating the need for insulation. They are professionals and businesspeople, and they understand the need for a business to make a profit to remain viable. What is your company’s net profit at the end of the year? The National Safety Council estimates that $1 in direct costs from an injury can become $3 to $10 in indirect costs. How much of this can a business sustain and still make a net profit?

The number of individuals who have never thought of or have been unable to grasp the implications of safety as they affect the bottom line of a business is amazing. Business owners are constantly evaluating the economic viability of their businesses by looking at the cost of production versus net profit at the end of the year. Frequently, when these numbers are found to be unsatisfactory, anything seems to be fair game for blame—except a lack of attention to safety. Managers will point the finger at increased prices for raw materials, the insulation we are installing, and fuel; the expenses of employee wages and benefits; and so on. How many managers, when evaluating these economics, ever sit back and look at the cost impact that their safety program—or lack thereof—has had on the bottom line?

The Cost of Ignoring Safety

Let’s take a minute and look at some of those costs. Of course, with the small contractor, it only takes one accident to have a significant impact, whereas multiple claims can have a similar impact on a larger company.

This article examines just the economic impact of safety issues and ignores the collateral issues that can arise, such as intentional tort lawsuits, Americans with Disabilities Act (ADA) claims, and Family and Medical Leave Act (FMLA) claims. First, there is the injury itself. In a typical injury, the employee will be off work for a minimum of 6 weeks. So, for the 6 weeks the employee is off the job, the company has to have a replacement worker. If the injured employee is a good producer who performs high-quality work, the replacement employee might have to work overtime to accomplish a similar quantity and quality of work. So, for this period, the company may have an additional $100 to $200 a week in labor costs to accomplish the tasks of the injured worker. In addition, the employees who are on the job, depending on the nature of the injury suffered by the absent worker, may slow their production because of their concern about their own safety. This can add significant time to accomplish the tasks required and, again, add to the cost of getting the job done.

After the accident, management must frequently perform an accident investigation. Depending on the seriousness and the complexity of the accident, this can tie a crew up for an entire day or more. This downtime can result in contract penalties if it impedes the ability to get the contract accomplished on time and/or requires overtime to be paid to the entire crew to get the job finished per the contract.

After the accident, while the injured worker is on workers’ compensation leave, the company’s workers’ compensation insurance premium will be affected by the cost of the claim. If the injury results in a lost time claim, the company could see a significant increase in its insurance premiums. Again, while one on-the-job injury can have a significant impact on a small employer, multiple injuries may have a similar impact on a larger employer. Of course, the more employees a company has, the greater the likelihood of lost time injuries occurring, especially with an employer who is not taking safety seriously.

What To Watch For

Following an accident, an increasing number of employees are calling the Occupational Safety and Health Administration (OSHA) to complain about the safety conditions on the job site. They do this for a number of reasons. If they have retained the services of a lawyer to pursue their workers’ compensation claim, the lawyer may advise an OSHA complaint to cause an OSHA investigation. This typically results in a free accident investigation for the attorney of the injured worker, enabling the attorney to gather information that might be useful in bringing a lawsuit against the employer, the principal, the general contractor, or some other third party who may have had some impact in the causal connection with the on-the-job injury.

Of course, the OSHA inspection will most likely require the company to contact its legal counsel to determine what, if anything, can be done to prevent an adverse impact on its overall safety record because of that investigation. There is an increasing number of general contractors who are barring subcontractors from even bidding jobs if they have had a willful violation within the 3 to 5 years preceding the contractor bid. So, now the company’s unsafe work practices, which were not a big concern before, may have resulted in increased workers’ compensation premiums, increased job costs, and an OSHA willful violation, which could cost the company many jobs in the future. And, of course, if the company decides to defend the OSHA willful, it will probably incur the cost of an attorney to either negotiate or litigate the willful violation to minimize the impact of the citation.

If the OSHA violations stand, the company will have the increased cost of OSHA abatement necessary because of the citations. In addition to this, the OSHA abatement must be completed within a set period and can result in significant changes in work practices and procedures. This could require retraining employees or performing initial training which, because of time limits, cannot be performed economically.

While all of this is going on, management cannot even think about taking any disciplinary or job action against either the injured employee or any employees who participated in the OSHA inspection or investigation and/or the injured worker’s workers’ compensation claim. Most states have antidiscrimination policies to protect employees who file workers’ compensation claims, and OSHA has an entire section of the statute devoted to protecting employees who complain about safety issues on the job site. Again, there is an increased number of these types of complaints being filed by employees who believe they have been discriminated against because they raised safety issues or caused an OSHA inspection to occur. An OSHA citation for discrimination results in a totally new issue that has to be dealt with by legal counsel.

If the OSHA investigation reveals information that is useful to the injured employee’s attorney, he or she may decide that he or she has a cause of action against the general contractor, the principal, the company’s customer, or some third party. In either of the first two examples, the company may have an indemnification or hold harmless contract with that party. Of course, when such a suit is filed, the company will immediately receive a reminder from the party being sued of its obligation to defend them and hold them harmless from any liability for injuries to its employees.

Safety Program: A Worthy Investment

The preceding is merely a sampling of what can occur and the impacts it can have on a business. If management takes the time to sit down and compare the potential costs of having a safety program with the adverse economic impacts the lack of a safety program can have on a business, they will easily see that “an ounce of prevention is worth a pound of cure.”

Why take the chance? If your company does not have a safety program, start one. If it does have a safety program, take a closer look at it. Make sure the company’s employees and the supervisors take it seriously. Having a good safety program can save tens of thousands of dollars in post-accident costs, legal fees, workers’ compensation fines and penalties, and abatement costs, all of which can occur because of one on-the-job injury.