As Published in Business 2 Business, July 2010

How Much Is Employee Absenteeism Costing Your Business?

By Ira S Wolfe, Success Performance Solutions

It's no secret that missing workers cost companies millions of dollars in lost revenue each year. Bill Shapiro, President of Workplace Medical Corporation, even calls employee absenteeism the “last unmanaged cost in business.”

Listen to Bill Shapiro discuss how to lower the cost of absenteeism on Workforce Trends Blog Talk Radio.

According to a survey by Mercer, "The Total Financial Impact of Employee Absences," the total cost of absence can equal as much as 36% of payroll when combined with the cost of absence related health care coverage. Of that figure, 9% accounts for unplanned absences. Planned absences, like vacations and holidays, average 26.6%. For a midsize business, this unplanned absence can drain millions of dollars per year from the bottom. These are startling numbers and a call to action for all organizations to get a better handle on this often unchecked cost. And with the youngest Baby Boomers entering their 50s, the number of disability claims is climbing with their durations increasing.

With so much at stake, it’s only logical that companies are beginning to pay more attention to costs of an absent employee. Chronic illnesses account for nearly 75% of total healthcare expenditures. With an aging workforce, current costs associated with absenteeism may only be the tip of the iceberg.

Approximately 80% of older adults have at least one chronic condition, and more than 50% have at least two chronic conditions. Diabetes, the leading cause of heart disease, stroke, blindness in adults, and end-stage renal disease, already affects 21 million people in the United States. While that’s approximately 8% of the total population, over 20% of people in the U.S. over 60 are diabetic. Poorly controlled diabetes and other chronic conditions in an aging workplace have significant economic impact, not the least of which is having absent workers on your payroll.

The good news is that if properly managed, according to Shapiro, a decrease of only 10% in employee absence costs could produce a 1-2% payroll saving. That’s a big chunk of change.

Before a company can manage its absenteeism, it must first define it. According to the the benefits.org website , “absenteeism can be most simply defined as failure of employees to attend work when scheduled to work.” The two major types of absences are “innocent” absenteeism and “culpable” absenteeism. In a white paper published by  Workplace Medical Corporation, the first refers to absences that were due to reasons beyond employee’s control (i.e. sickness and injury) while the second refers to absences with employee’s control (extending a long weekend without authorization.)” Unfortunately for a variety of reasons, companies often find it difficult to distinguish the two. For example, are employees innocent or culpable if they call in “sick” at the last minute to take care of an aging parent or sick child?

Without clear definitions of what constitutes innocent and culpable absence, it is difficult for any organization to hold the abusers accountable and to manage the innocent effectively.
Of all the absences reported by employers, two-thirds appear to be innocent due to illness and disability. While difficult to prevent, employers can effectively manage innocent absences by better reporting, early intervention, and prompt return to work policies.

Unfortunately that leaves one-third of all employee absences as “culpable.” And two-thirds of U.S. workers who call in sick at the last minute do so for reasons other than physical illness, according to the findings of the 17th annual CCH Unscheduled Absence Survey. It’s these unscheduled absences that are driving employers crazy. The nation’s largest employers estimate that unscheduled absenteeism costs their businesses more than $760,000 per year in direct payroll costs, and even more when lower productivity, lost revenue and the effects of poor morale are considered.

To determine the real cost of absenteeism, employers must consider both the direct and indirect costs incurred when an employee is absent. While direct costs of absenteeism can be more easily calculated, indirect costs often exceed the direct costs.

Direct costs are the benefits paid to the employee to provide income during an absence. These include sick, holiday and vacation pay as well as a disability benefit when available. They also include the wage cost of the replacement, overtime payment for present employees, and creep in the short-term and long-term disability costs. Employers already do a pretty good job of tracking these costs.

What many employers fail to do is consider the indirect costs. These costs are typically ignored or poorly tracked but account for a considerable and controllable loss dropped to the bottom line. Indirect costs include the lost productivity due to extra workload, time lost to train and support replacement workers, and lower morale. Absentee workers add administrative costs: staff time required to secure replacement and to manage the reporting.

Even having an ample supply of replacement workers slows but does not stop the "bleeding." The Mercer study reports that replacement workers are less efficient. Unplanned absences like casual sick days result in the highest per-day productivity loss, 21% versus just 15% for planned absences like vacation days. Replacement workers were also found to be:

• 71% as efficient during unplanned incidental absences

• 79% as efficient during planned absences

• 80% as efficient during extended absences

What can you do to manage the costs of absenteeism?
Like many other solutions, absenteeism management starts with knowing your costs and educating your employees and managers.

“The biggest mistake that companies make,” according to Shapiro, “is they lack proper policies and procedures….and even when they do, they do not enforce them consistently.” Supervisors often have to make their own rules about absences, which can vary depending on the supervisor’s philosophy, their engagement with employees, availability of replacement workers, busyness of production, and so on. Effective absenteeism management requires consistency. The disposition of any employee shouldn’t lie in the personal philosophy of a supervisor or HR manager.

Even when policies are in place, human resources and operations don’t always work hand-in-hand. Absenteeism is often seen as an HR problem. That might be true from an administrative perspective but missing workers ultimately affect production and finance even more. Employees often do not know whom to call. Even when they do know, the reporting mechanism doesn’t always support productivity. If the employee leaves a message with HR at 6 AM, what happens when HR staff doesn’t arrive until 8 AM? That’s a breach in the people supply chain since the supervisor’s shift started at 7 AM. Vice verse, if the employee notifies the supervisor, how and when is it reported back to HR? Who is responsible to enforce the policy, especially if the absence is unscheduled?

Managing absenteeism isn’t immune to Murphy’s Law either. Despite the best controls, a few employees will still abuse the system if they are given the opportunity. Screening out high-risk candidates before they become chronically absent employees is the best solution. Multiple studies confirm that pre-employment tests that assess employee attitude toward dependability and conscientiousness can reduce culpable absenteeism as much as 50%.

When it comes to managing absences, prevention, policies, and procedures are the best medicine.

About the author

As president of Success Performance Solutions, Ira S Wolfe helps organizations find and hire the right employees and identify high-potential leaders. He speaks nationwide on hiring, workforce trends, managing the generations in a presentation titled Geeks, Geezers, and Googlization. He is also the author of Perfect Labor Storm 2.0: Trends That Will Change the Way You Do Business.