NCCI MOD Management, Employee Safety Training, Class Code Review and
Workers’ compensation claims have a variety of different costs associated
with them. Some of these costs are expected costs, while others are
unexpected. Here’s the difference between these terms:
o Expected costs are those that are covered by workers’ compensation
insurance. Such expenses are commonly referred to as direct costs.
o Unexpected costs are those that workers’ compensation insurance does not
cover. These expenses are commonly referred to as indirect costs.
According to the Occupational Safety and Health Administration (OSHA), both
direct and indirect costs can have a substantial impact on employers and
their bottom lines. As such, it’s important for employers to understand the
difference between direct and indirect costs, how to reduce these costs and
why it’s important to do so.
Direct vs. Indirect Costs
Direct and indirect costs are determined by which expenses workers’
compensation insurance will or will not cover. To reiterate, direct costs
are those that are covered by such insurance, which can include:
o Employee wage benefits—These benefits include temporary total, temporary
partial, permanent partial and permanent total disability. Employers have to
pay these benefits when an employee is unable to work or return to work in
o Medical payments—These payments refer to any medical costs needed to treat
an employee’s injury.
o Vocational rehabilitation costs—These expenses are any costs associated
with an employee’s rehabilitation (e.g., training and career
o Death/dependency benefits—These benefits are for the spouse or dependents
of an employee who was killed by a work-related injury. Such benefits vary
o Legal fees—These fees include those associated with a workers’ compensation
claim, any civil liability expenses and settlement costs.
Indirect costs for a workers’ compensation claim are those not covered by
such insurance. These costs can vary depending on the extent of an
employee’s injury. Some indirect costs include:
o Wage and hour costs—These additional costs are incurred by employees who
must work extra hours to compensate for another employee’s time away from
work. This includes hiring temporary workers or having employees work
overtime to fill in for the missing worker.
o HR support expenses—This includes the increased work and time incurred by
individuals who handle workers’ compensation claims and related
o Claim investigation costs—This includes costs associated with the
investigation of a workers’ compensation claim if there is a concern of
o Hazard mitigation costs—This includes costs associated with mitigating the
hazard(s) that caused an employee’s injury.
o Production deadline extensions—An injured employee’s absence can cause
delays in production, thus increasing production costs and negatively
affecting business contracts.
o Training expenses—This refers to the costs of training other employees to
fill in for an injured employee if they are unable to return to work in
their original capacity. This can be a temporary or permanent arrangement.
If it’s permanent, the company may have to cover the costs of hiring a new
o OSHA fines—If an employee is injured or killed at work, an inspection will
be triggered and the employer may be subject to OSHA citations for any
safety issues found during the inspection. Also, the more employee injuries
and fatalities an employer experiences, the higher their business’s incident
rate will be—thus triggering more OSHA inspections.
o Insurance premium expenses—The more injury-related costs an employer
experiences, the higher their experience modification factor will be. As a
result, their business may be considered high risk and could receive
increased premium rates.
o Repair costs—Repair expenses associated with property or equipment can also
be considered indirect costs, depending on whether or not the property or
equipment was involved in an injury-causing incident.
o Workplace culture concerns—A company with a high rate of injury may
encounter poor employee morale, particularly because employees may begin to
think that their employer does not care about their well-being. Typically,
the lower morale is within a company, the higher incident rates will
o Reputational struggles—A company with a high rate of workers’ compensation
claims can garner a bad reputation. With a poor reputation, business
contracts and qualified workers may be difficult to secure. A bad reputation
can negatively impact an employer’s bottom line and even lead to their
business closing down altogether.
Controlling these direct and indirect costs can be beneficial for
employers. That’s why it’s crucial to be proactive.
Reducing Direct and Indirect Costs
It’s important for employers to understand that investing in their safety
programs can positively affect the outcome of direct and indirect costs. For
instance, managing safety programs at a business and having employees
actively engage in hazard identification can reduce the likelihood of
injuries. By reducing injuries, direct costs related to expenses such as
wage benefits and medical payments will also decrease. This will, in turn,
lower indirect costs as well.
Having a successful safety program is the foundation of reducing workers’
compensation claims. If an employer cannot eliminate workers’ compensation
claims, another way to reduce direct and indirect claims is to proactively
manage claims. This can involve working with employees to get them back to
work quicker after an injury and following up with claims handlers.
Furthermore, participating in the claims process can improve communication
between an employer and their employees, as well as the employer and their
Having an effective return-to-work program can also help with reducing
direct and indirect costs. Having other work options for employees that fit
within their medical restrictions encourages employees to return to work
quicker, thereby reducing a significant amount of direct and indirect costs.
The Importance of Reducing Direct and Indirect Costs
Minimizing direct and indirect workers’ compensation costs is critical. By
reducing injuries, a company can continue to function normally, avoid
interruptions, and prevent issues with production or business contracts.
According to the National Safety Council (NSC), work-related injury costs
for employers in 2019 totaled $171 billion. This total can be broken down as
o $52.9 billion in wage and productivity losses
o $35.5 billion in medical expenses
o $59.7 billion in administrative expenses
Employers’ uninsured costs ($13.9 billion), property or equipment damage
($5 billion) and fire-related losses ($3.7 billion) also contributed to this
In breaking these costs down, the NSC found that such expenses came out to
$1,100 per employee. Further, the average cost per fatality was $1.2
million, while the average cost of an injured employee’s medical treatment
Overall, by reducing employee injuries, employers can help create a
positive work culture and lower workers’ compensation expenses— thus
minimizing both direct and indirect costs.
Contact Benton Luttrell Company to discuss your workers’ compensation