The Real Costs of Non-Compliance

Many workplaces are under the fallacy that once an incident or injury occurs in their workplace they are covered by insurance and it will have little to no impact in terms of liability and cost. This leads them to take a laid-back attitude towards safety compliance. 

What they need to understand is that insurances do not cover all expenses related to workplace incidents or accidents and that there are other associated costs that will impact the operations of the business. More so, the associated costs are much larger. 

The Iceberg Theory 

When we examine the iceberg theory, we learn that the cost of workplace incidents or injuries are just the tip of the iceberg, that forms approximately 20 per cent of the workplace’s total liability. So, what about the 80% that is the associated cost, or the hidden cost that is not accounted for, yet impacts on the operations of the business. Put simply these are known as direct and indirect costs.

What are these costs? 

The Direct Cost 

The direct cost or the tip of the iceberg includes: 

• Wages and Salaries 
• Worker compensation and Rehabilitation 
• Damages to goods and property 
• Damages to plants and machinery 
• Work Stoppages 
• Clean up 
• Fines 

The direct costs of workplace accidents, are easily distinguished and calculated and generally covered by insurance. 

The Indirect Costs 

The Indirect costs are all the “uninsured” additional costs associated with the accident. These cannot be easily distinguished and may be 4 – 10 times greater than the direct cost.  It is important to understand that the indirect cost are expenses that impact business profitability and viability. 

The Indirect or hidden cost includes: 

• Downtime 
• Loss of production 
• Accident investigation 
• Personnel managing the worker compensation claims and cases 
• Supervisor involvement with an accident investigation process 
• Increases in insurance premium 
• Project delays 
• Industrial Relations issues 
• Overtime payments 
• Training and retraining costs 
• Legal fees and damages for negligence 

The workplace can suffer a further loss such as: 

• Risk of losing current contractual work 
• Damage to their reputation and 
• Risk to future contractual work 

Let’s surmise using this case 

Recently, we learnt via the media, that an abattoir was charged $95K by WorkSafe Victoria, under Section 21, following a forklift collision with two people on the work premises. The worker sustained two broken ribs, while the director escaped injury.  

Whilst their insurances may have covered the legal cost, and the workers’ compensation and rehabilitation of the injured workers, this serious accident would have greater implications in the workplace.  

What was the real cost to that workplace? 

If we use the iceberg theory; and the abattoir as an example, with the fine of $95K, and two workers who were injured, (one seriously); we estimate $20K for workers compensation cost.  Our Direct cost totals are $105K. If this amounts to 20% of the cost of the workplace accident and the iceberg theory indicates that the indirect cost or hidden cost is 80% this gives us a total of $845K. So, this would be the approximate indirect or associated cost to the abattoir following the workplace accident. This amount is 4 times greater than that, that is covered by insurance. 

Non-Compliance Comes at a Cost 

The media report is that WorkSafe Executive Director, Julie Nielsen said the extreme danger forklifts posed when used without proper safety measures in place was well known. In the case of the Abattoir, the worker could have been prevented from receiving debilitating injuries had the abattoir had an appropriate traffic management plan, which includes physical separation of forklifts and people.   

Given the associated cost wouldn’t the best option be to manage the risk by updating the traffic plan and erecting the physical structures to prevent workplace accident and injury to workers? The media reports that it was the fifth time this company has been convicted of violating health and safety law. 

If the indirect cost comes as a loss to the business; wouldn’t it make sense to be proactive and implement preventative strategies?