Ergonomic Economics

True Cost of an Employee Injury

Step 1

Determine The Company's Direct Costs:

Direct costs are costs of all insurance claims for any injury or illness.

Step 2

Determine The Company's Indirect Costs:

Indirect costs are those needed to cover the costs of hiring temporary workers, additional training, etc. OSHA has developed a formula to estimate indirect costs, based on a company's direct costs. Multiply the direct costs by the cost multiplier in the chart below.

If the Direct Costs are:

$0-2,999

$3,000-4,999

$5,000-9,999

> $10,000 Cost Multiplier is:

4.5

1.6

1.2

1.1

Step 3

Calculate The Company's Total Costs:

Total Costs are obtained by adding your company's direct costs to its indirect costs.

Step 4

Calculate The Company's Profit Margin:

Simply stated, the Profit Margin is a ratio of the net profit divided by the total sales. For example, if items sold made $105 but cost $100 to make, the net profit is $5. Profit margin is then obtained by dividing $5 by $105, which is 4.8%. Smaller rapid growing companies often have profit margins of 10 or 20%. Larger firms often aim for 2 or 3% a year. For Associations or Government Agencies, use a 5% Profit Margin figure.

Step 5

Determine the True Impact on Profitability:

Divide the Total Cost (TC) of the injury by the Profit Margin (PM). This figure represents the sales required to pay for the occupational injury or illness. In other words, this is the amount of additional sales needed to maintain the current profit margin.

Analysis

Example:

Suppose an employee had Carpal Tunnel Syndrome surgery and the insurance claims total $10,000. The Indirect Costs can then be estimated at $11,000 and the Total Costs become $21,000. If we assume a profit margin of 5%, then the true impact of this employee's surgery is $21,000 divided by 5% or $420,000, which is the estimated additional sales needed to maintain this company's 5% profit margin.