Direct and Indirect Workers’ Compensation Costs Explained

Understanding the complexity of workers’ compensation can be daunting. Claims can be associated with a variety of expected and unexpected costs. To help you protect your organization, we have broken down workers’ compensation expenses to help you understand how to manage your risk.

Direct costs are expenses that are covered by your workers’ compensation insurance. Indirect costs are unexpected costs not compensated by your workers’ compensation policy and vary by the extent of the employee’s injury.

Direct Costs

Examples of direct costs covered by your workers’ compensation insurance:

  • Employee wage benefits may be paid to an eligible employee who is unable to work or return to work at full capacity. Wage benefits vary by state and may include temporary total, temporary partial, permanent partial and permanent total disability.
  • Medical payments refer to any eligible medical expense required for treatment of an employee’s work-related injury.
  • Vocational rehabilitation costs are expenses associated with an employee’s rehabilitation (e.g., training and career counseling).
  • Death/dependent benefits compensate a spouse and/or dependents of an employee who died directly from a work-related injury. These benefits can vary by state.
  • Legal fees include expenses associated with a workers’ compensation claim, civil liability expenses and settlement costs.
  • Claim investigation costs involve costs associated with the investigation of a workers’ compensation claim if there is a concern of fraud.

Indirect Costs

Examples of indirect costs not covered by your workers’ compensation insurance:

  • Wage and hour costs accumulate from compensation to perform the injured employee’s duties during their leave. This includes hiring temporary workers or providing overtime to current employees.
  • HR support expenses include specialized training and increased workload for HR staff who handle workers’ compensation claims and related paperwork.
  • In-house claim investigation costs involve costs associated with the investigation of a workers’ compensation claim if there is a concern of fraud.
  • Hazard mitigation costs include expenses associated with mitigating the hazard(s) that influenced an employee’s injury.
  • Production deadline extensions occur when an injured employee’s absence causes production delays which influence rising production costs and negative business contracts.
  • Training expenses arise from instructing employees to temporarily or permanently cover for an injured employee who is unable to work at full capacity. When permanent, the company may need to cover the costs of employing new workers.
  • OSHA fines occur from safety issue citations discovered during an inspection triggered by an employee injury or death. An organization’s incident rate increases with each employee injury and fatality. The ratio is influential upon OSHA inspection frequency.
  • Insurance premium expenses occur when a business is considered higher risk. Frequency of employer injury-related costs is directly related to a potentially higher experience modification factor.
  • Repair costs for property or equipment may be considered an indirect cost if it was involved in the injury-causing incident.
  • Workplace culture concerns can occur when an organization experiences a high rate of injuries. Employees may view their employer as complacent regarding their wellbeing. Higher incident rates are commonly influenced by lower company morale.
  • Reputational struggles can result from a high rate of workers’ compensation claims. A poor reputation can negatively impact an employer’s bottom line and the future of their business.

Reducing Direct and Indirect Costs

Dedicated employers can experience benefits from controlling direct and indirect costs. Investing in safety programs will positively impact direct and indirect expenses and reduce workers’ compensation claims.

Expenses can be reduced by proactively managing claims. Working with the injured employee and claims handler can influence a quicker return to work. Participating in the claims process will improve communication between the employer, injured worker and the insurance company.

An effective return-to-work program will help reduce direct and indirect costs. Providing medically appropriate modified-duty work options can encourage quicker recovery times and return to work, while potentially reducing direct and indirect costs.

The Importance of Reducing Direct and Indirect Costs

Recent data (2019) from the National Safety Council (NSC) indicates employer work-related injuries cost $171 billion annually, including:

  • Administrative costs ($59.7 billion)
  • Wage and productivity losses ($52.9 billion)
  • Medical expenses ($35.5 billion)
  • Employers’ uninsured expenses ($13.9 billion)
  • Property and equipment damage ($5 billion)
  • Fire-related losses ($3.7 billion)

The NSC estimates these costs average $1,100 per employee. An employee fatality costs an employer $1.2 million per death, while the average injured employee’s medical expenses cost $42,000 per incident.

Reducing employee injuries influences a positive work culture and lower workers’ compensation expenses—minimizing both direct and indirect costs.

Here to Help

You do not have to respond to the complicated workers’ compensation landscape alone. We are here to help you navigate and reduce employee injuries to minimize both your direct and indirect costs. For additional resources, risk management guidance or insurance solutions, please contact one of our team members today.

Direct and Indirect Workers’ Compensation Costs Explainedhttps://www.cbiz.com/LinkClick.aspx?fileticket=hNIV-Oauqgk%3d&portalid=0Understanding the complexity of workers’ compensation can be daunting. Claims can be associated with a variety of expected and unexpected costs.2021-06-16T16:00:00-05:00Understanding the complexity of workers’ compensation can be daunting. Claims can be associated with a variety of expected and unexpected costs.Risk MitigationProperty & Casualty InsuranceYes