The dollars of disability

The rising cost of health care is a hot topic for employees and employers these days, especially as it relates to employee absences due to disabilities. With the continued economic downturn, employers are all searching for ways to better use finite resources. Health care costs more than 13 percent of payroll,1 and employers spend a lot of resources implementing strategies to reduce this number. But did you know the total costs of all major absence categories — including direct and indirect costs — average 35 percent of base payroll?2

This was the startling finding of a 2010 study by Mercer, Survey on the Total Financial Impact of Employee Absence.2 To properly digest the enormity of this problem for your company and devise a plan to reduce its business impact, we should start by understanding the different types of absences.

Absences are placed in four categories:

  • Planned — Scheduled and approved in advance (e.g., PTO or vacation)
  • Unplanned incidental — Up to five days where occurrence was not known (e.g., sick)
  • Extended — Lasting more than one week; often unplanned and due to disability (e.g., Family Medical Leave Act (FMLA) or state equivalent)
  • Intermittent — May be minutes, hours or days and generally caused by previously certified medical condition(s) (e.g., medical appointment)

For our purposes here, we will focus on those unplanned incidental and extended absences typically associated with disability. Before we can drill into those numbers, we should have an understanding of the different absence-related costs.

The U.S. Department of Labor estimated that 2 percent to 5 percent of an employer’s workforce was absent on any given day in 2010.3 The direct and indirect impact of absence, particularly the resulting cost, is significant.

A June 2010 report by Kronos Incorporated and Mercer included some fascinating findings from its survey of 276 organizations from all industries, sizes and regions throughout the United States.

  • Direct costs of incidental, extended absences (short term disability and FMLA) were 2.6 percent of payroll; total costs were 8.7 percent
  • Total costs of extended disability absences were 2.9 percent of payroll4

The total cost is the sum of direct and indirect costs with the indirect being offset by salary, which is captured in direct costs. “Additional impacts” may be more difficult to quantify.

Direct costs:

  • Insurance premiums such as medical, workers’ compensation and STD/LTD
  • Salary continuation/sick leave
  • Other benefit continuation during absence (e.g., pension)

Indirect costs:

  • Overtime
  • Job accommodations
  • Replacement workers (recruiting, hiring, training, etc.)

Additional impacts:

  • Employee morale (burnout, stress)
  • Reduced performance (quality)
  • Lowered productivity (missed deadlines, lower output)
  • Lost business
  • Administrative expenses (vendors’ services, overhead)

These numbers are clearly impactful to an organization. Reducing the frequency and length of disability-related absences is a big opportunity to impact the company’s bottom line. What is your organization doing to reduce its dollars spent on disability? Embracing a stay-at-work and return-to-work philosophy can be a big step toward that end.

  • A stay-at-work program uses ergonomic intervention as a disability prevention strategy to reduce incidence.
  • A return-to-work approach includes driving the interactive discussion and implementing reasonable accommodations, when possible, to reduce the duration of disability-related absences.

First and foremost, track baseline disability metrics so you can measure and report the extent of the problem at your company. Following implementation, you can compare that data with your updated figures to show the impact of these programs. Your disability carrier and other business partners should be able to help. As always, formalize your processes, and communicate and train those who will be involved with its administration.   


1 Unplanned Absence Costs Organizations 8.7 Percent of Payroll, More than Half the Cost of Healthcare, According to New Mercer Study Sponsored by Kronos. Kronos. 2010. Available at http://www.kronos.com/pr/unplanned-absence-costs-organizations-over-8-percent-of-payroll.aspx. Accessed on Dec. 15, 2011.

2 Survey on the Total Financial Impact of Employee Absence. Mercer. 2010. Available at http://solutions.kronos.com/forms/q1-11-mlt-wnr-workforcecom-cost-of-absence-wp. Accessed on Dec. 15, 2011.

3 Household Data Annual Averages. U.S. Bureau of Labor Statistics. 2010. Available at http://bls.gov/cps/cpsaat47.pdf. Accessed on Dec. 15, 2011.

4 See Footnote 2

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