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QUANTIFYING THE COSTS OF ABSENCE
There is no shortage of data to describe the scope of the absence problem. One widely reported study suggests that absence costs account for as much as 15% of every payroll dollar, or more than half of a typical employer’s benefits spending.2
Those costs are driven by absences that fall into two general categories: scheduled and unscheduled.
Vacation and personal holidays comprise the largest components of the scheduled absence category. Scheduled absences are usually tracked through any number of sophisticated payroll or exception time reporting systems. But they can still lead to excess costs when leaves are not reported, if leave is taken that has not been earned, or if it is taken by an ineligible employee.
Beyond more effective tracking and compliance controls, little can be done to squeeze savings from scheduled absences, particularly since managers have the opportunity to plan for coverage. However, the unscheduled absences, which account for nearly all of the other leave types, are much more difficult to plan for. Because of this, they are often the most costly, and they offer managers the clearest opportunity for control and savings.
Whether employee absence is scheduled or unscheduled, its impact surfaces in a number of different ways. Typical organizational impacts include:
LOST PRODUCTIVITY – Lean organizations may not be able to deliver on service and productivity commitments. What’s more, the employees who do come to work are often pushed to make up for those who are absent. Ultimately, these employees become dissatisfied with covering for absent employees, and thus become candidates for absenteeism themselves.
HIGH-COST REPLACEMENT WORKERS – In order to hit service and productivity commitments, employers often replace missing employees with replacement workers or contractors, as well as paying overtime and higher rates. Overtime levels of 28% have been reported in facilities with high absenteeism rates.3
OVERSTAFFING – Some employers maintain higher than necessary headcounts in order to compensate for unplanned absences. As an example, one employer routinely increased scheduled staff by 13% on weekends to cover for increased absenteeism on Saturdays and Sundays.4
Both direct and indirect costs associated with employee absence can be extrapolated from these operational impacts.
With respect to direct costs, variations exist for hourly and salaried employees. For example, hourly workers typically generate higher hourly costs since they and their replacement are both being paid during the absence. Salaried workers, on the other hand, tend not to be replaced when absent, but they do tend to have a greater impact on customer demands and the ability to generate revenue.
Considering both types of direct costs together, and using conservative assumptions, an employer with 5,000 employees can anticipate direct absenteeism costs of as much as $18 million per year, while an employer with 10,000 employees can expect that figure to climb as high as $36 million per year.5
Somewhat more difficult to quantify are the indirect costs of absence. However, as noted earlier, absence can affect morale, which can lead to other significant business issues, including a cycle of increasing absence, and even migration between health benefits and absence programs. A brief list of indirect costs includes:
INCREASED TURNOVER – Studies suggest that turnover is about 7.8% per year for employers with low to average absenteeism, but it is about 10.6% per year for employers with high absenteeism. Again using conservative estimates, recouping even half of the 2.8% annual difference in turnover could save a company of 5,000 workers about $2 million per year.6
POOR QUALITY – The quality of goods and services has been shown to suffer because of fatigue associated with excess overtime. Further, a 2007 study in the Journal of Occupational and Environmental Medicine found that fatigue costs U.S. employers more than $136 million per year in lost productivity.
CUSTOMER DISSATISFACTION – Constraints caused by absence on an employer’s ability to meet customer demand lead to dissatisfied customers.
ADMINISTRATIVE INEFFICIENCY – Managers experience significant opportunity costs as a result of employee absence because of the increased time they spend disciplining employees, terminating employees, and finding replacement coverage, among other items.
REDUCED MORALE – Employee morale is impacted when employees who do come to work are forced to compensate for absent employees. Studies suggest that absenteeism is about 7.5% per year for organizations with good morale and 9.4% for organizations with poor morale. And the process is cyclical: increased absence lowers morale, which results in increased absence.7
POOR HEALTH – Organizations that experience significant overtime as a result of excess absenteeism tend to demonstrate poorer overall employee health than organizations with lower absenteeism levels.
Among the more difficult-to-quantify costs of absenteeism is the cost associated with migration from health benefits to absence programs. In one case of such migration, health issues such as obesity can lead to increased risk of occupational injury, workers’ compensation costs, and absenteeism. In fact, extremely obese employees are absent more than 13 times as long and drive more than 7 times the medical costs, on average, as healthy-weight employees.8 Through an integrated approach, those costs are measurable and their drivers are identifiable.
For example, a Fortune 100 pharmaceutical company that was concerned about its overall employee health quotient needed to know whether it was realizing any return on its Health Risk Appraisal (HRA) program. A study9 of the HRA’s usefulness as a predictive tool not only demonstrated the key risk factors that were most useful in predicting increased medical costs, but it also revealed that the HRA is a powerful predictor of future disability and workers’ compensation claims. By taking an integrated view of its programs, including health and absence programs, the employer is now able to tailor employee wellness and education programs that not only control medical costs, but that also reduce migration from healthcare to absence programs – and thus help control the cost of absence.