Learn about the direct and indirect costs of a workers’ compensation claim for your business

In Florida, businesses are legally required to have workers’ compensation insurance for their employees, and it’s extremely valuable in terms of protecting businesses from liability and avoiding out-of-pocket costs for employee injuries.

However, many businesses will inevitably be faced with direct and indirect costs of workers’ compensation insurance if a claim is made. It’s important to be familiar with these costs and strategies for mitigating them as much as possible.

Continue reading to learn how a workers’ compensation claim affects employers. 

How does a workers’ comp claim affect employers?

If your employee is injured on the job, they’ll file a claim against your workers’ compensation policy, and you will be affected by direct and indirect costs. In the long run, the indirect costs will be much more burdensome than the direct ones. 

Small businesses often experience greater negative impacts from workers’ comp claims than larger organizations because they have less emergency funds to help absorb the financial losses. Bigger businesses are also often equipped with thorough safety programs to avoid workplace incidents entirely and HR employees with more experience in managing claims when they arise. 

What are the direct costs of workers’ comp claims?

Easy to identify and quantify, the main direct cost of a workers’ comp claim for employers is the workers’ compensation premium.

The premium is paid on a regular basis, so that in the event an employee is injured, the insurer pays for the necessary medical care, rehab services, and other care associated with the covered claim. 

What are the indirect costs of workers’ comp claims? 

Unlike direct costs, the indirect costs of workers’ comp claims are difficult to identify and quantify. They are the expenses not covered by the workers’ compensation insurance premium, and they often cost much more than the direct costs.

For example, according to Occupational Safety and Health Administration (OSHA), a workers’ comp claim with direct costs of up to $2,999 has an indirect cost ratio of 4.5. [1] The less severe the injury, the higher the ratio of indirect to direct costs for employers.

The most common indirect costs of a workers’ comp claim include:

• Administrative duties are the most substantial time and money losses from a workers’ comp claim. Your administrative and HR staff will be heavily burdened with paperwork and a variety of responsibilities that must be completed in the event that an employee is injured to properly process the workers’ comp claim. 
• Payroll costs are often affected in one way or another by a workers’ comp claim. While workers’ comp should cover a portion of your injured employee’s lost wages during recovery, you will likely owe your employee for any absences that aren’t covered. If your employee is out for a while, you will have to hire, train, and pay a temporary replacement or pay overtime to your existing employees that have to take on a heavier workload. 
• Insurance premiums could increase in the event of a workers’ comp claim because they directly affect the experience modifier used to calculate insurance premium rates. Every workers’ comp claim remains on your business’s record for three years, so you could be burdened by more expensive premiums for at least that long. A single workers’ comp claim does not guarantee that your premium costs will increase, but it is a definite possibility that your team should prepare for. 
• Loss of productivity and morale is another indirect cost of workers’ comp claims. In addition to the injured employee, other employees can feel upset and burdened by the incident because they resent having to work overtime or feel that you are not properly handling the incident. 
• OSHA fines are a possibility in the event that the injury your employee experiences is extremely serious. If your employee is severely harmed, OSHA may investigate your business over the phone or onsite to ensure there are no serious violations that result in fines.  
• Legal fees can be a hefty cost for your business if you decide to contest a workers’ compensation claim in the case that you believe it’s illegitimate. In most cases, employers end up spending more in legal fees than if they had simply settled the claim with their employee. One study found that litigated workers’ comp claims cost 388% more than non-litigated ones, and it took 195% longer to resolve a claim when an attorney was involved. [2]  

How can I avoid the costly effects of workers’ comp claims?

The best way to avoid the costs of a workers’ comp claim is by creating or updating your workplace safety program to avoid accidents from ever happening. The appropriate safety measures will allow your business to be proactive instead of reactive. 

Working with a trusted outsourced partner like a PEO can provide you with the guidance you need to correct workplace safety hazards, so that they are in line with OSHA regulations and inspections.

Learn more:

Five reasons to partner with a PEO for workers’ compensation 

In need of assistance with workers’ compensation for your business? 

With experience outsourcing HR services to small and medium-sized businesses across Central Florida for over 25 years, our team at PER will assume the administration of your required workers’ comp policy as your co-employer. We will work directly with the carrier to minimize costly escalated claims while assisting in creating light duty work to get employees returning to work quickly.

As a part of our comprehensive workers’ compensation services, we offer: 

• Master Insurance policy 
• No deposit: Pay premium as wages are paid
• Premium calculation and reporting
• Claims management and loss control
• Safety Training Guidance provided
• OSHA record keeping with OSHA Logs provided to employers for compliance
• Assistance with creating light duty work for injured employees

Ready to tap into the extensive capabilities of a full-service PEO? 

Contact us today to get started!

Sources:

1: Occupational Safety and Health Administration (OSHA) | OSHA’s Safety Pays Program

2: Claims Journal | White Paper Reveals Impact of Attorney Involvement on Workers’ Comp Claim Costs