Gone but Not Forgotten 

Vol. 56     No. 9 

You may think you know what employee absences cost your company; chances are you don’t. Here’s how to minimize losses. 

The crazy quilt of leave entitlements drive even the most detail-oriented HR manager bonkers. Applying them is challenging, complicated and vexing. Ever-changing, overlapping federal, state and municipal laws, regulations and court decisions can be confusing, conflicting and open to interpretation. And dealing with irritated supervisors trying to fill staffing gaps that result from employee absences is one of HR professionals' most thankless tasks.

Consider the Family and Medical Leave Act (FMLA) and the intermittent leave it permits. Managers "are very frustrated with workers who they believe are 'playing the game,' " says Sandi Boller, vice president of human resources at St. Louis-based U.S. Bank, which has 62,000 employees. "The employee simply has to call the manager and say, 'I'm not coming in.' So long as the doctor provides documentation confirming the employee's need to take four or five days off per month, there's no further medical documentation required."

And FMLA leave can be taken in small increments. "It could be from three to five minutes," says Cheryl Pasa, SPHR, executive director of People Services at USAA, a San Antonio-based provider of financial products and insurance to members of the U.S. military. "Once they get certified for an FMLA condition, they can be gone whenever they want. And you have no choice; you can't discipline them or consider their absences in a transfer or promotion decision."

C-suite executives, even chief human resource officers, tend to assign absence management low priority, seeing it as encompassing uncontrollable, transactional activities that they must endure as a cost of doing business. "It is a pain to deal with, so it tends to get pushed down in the HR hierarchy," says Marcia Carruthers, chief executive officer and president of the Disability Management Employer Coalition in San Diego.

For HR executives such as Loyd Hudson, integrated disability manager of American Electric Power in Columbus, Ohio, such lack of interest represents a lost opportunity to maximize productivity, achieve millions of dollars in savings, and instill fairness and equity in the way employees are treated.

A Powerful Case
More than a decade ago, Hudson began integrating 42 separate leave programs into a Recovery Center where HR staff coordinate all leave management from the time an employee is absent until he returns to work. The savings have been impressive.

If you manage such an initiative carefully, "you can cut your absence rate and reduce spending in other ways," Hudson says. "When I started in 1998, workers' comp cost was $16 million. Today with 18,700 employees, 7,000 more than then, it's only $8.9 million." In 1997, workers' comp was 1.3 percent of payroll; last year it was 0.55 percent. Long-term disability was 0.9 percent in 1997; now it's 0.57 percent.
The absence rate on any given day at American Electric Power is 3.6 percent of staff—"about half of what experts say is the norm," he says. "That means more people are here and contributing than before; I'm not having to pay overtime, over-staff or fill their positions some other way."

U.S. Department of Labor studies show that absences are a substantial and growing expense of doing business, costing employers nationwide perhaps as much as $100 billion per year.
Labor officials estimate that 3 percent to 5 percent of an employer's workforce was absent on any given day in 2010. Other experts project the average daily rate as high as 8 percent.

Strategic Wasteland
Despite the benefits of approaching absence management holistically, many employers aren't doing so. There are chances to achieve savings and be more efficient, but employers aren't taking advantage.

"With limited exceptions, there is no strategy at the employer level," says Kevin Curry, national practice leader of the Reed Group in Westminster, Colo. "Few executives are asking if their systems are efficient, up-to-date technologically or building in meaningful metrics."

Most employers are not tracking absence-related expenses, confirms Cara Bass. "Maybe one in 10 HR people know about these costs," says the health and benefits business leader for Mercer, based in Interlachen, Fla. "Every CEO knows that health care costs 13.6 percent of payroll, and they pay plenty of attention to managing it. But ask them what unplanned and intermittent absence is costing and they're in the dark. It's a huge number: 8.7 percent of payroll."

In an April survey conducted by Liberty Mutual Group, 49 percent of respondents said they do not know what their organizations' absence-related costs are. Respondents were HR and benefits executives and financial managers representing 331 organizations of all sizes from a cross section of industries and geographic locations.
Even those who claim to know their organizations' costs often underestimate them. Fifty-one percent of the employers claimed to have a handle on costs. Of these, 86 percent said they were spending less than $1 million per year. In fact, based on direct-cost estimates alone, even small employers surveyed understated their costs by millions.

According to Mercer's Survey on the Total Financial Impact of Employee Absences, employers' direct costs of all absences reached 12.2 percent of payroll in 2010. Thus, an employer that has 500 employees and pays an average annual salary and benefits of $60,000 would spend $3.7 million per year on folks who did not work. Employers with 5,000 employees would spend $37 million.
The direct cost of an absence is the compensation an employee receives for time not worked. It may be full-salary continuation for vacation, sick leave, personal leave or short-term disability, or a separate benefit paid by a disability carrier. If an employee earns $200 per day and receives a disability benefit of 75 percent of pay, for instance, the direct cost is $150 per day.

There are also indirect costs, especially for unplanned absences: what it costs to continue operations while employees are on leave. Employers may hire temporary or replacement workers, offer overtime, add responsibilities to supervisors, or carry additional workers on the payroll in anticipation of absences. Or they may opt to do nothing—leading perhaps to lower productivity, revenues lost because fewer customers are served or fewer products manufactured.

All organizations incur direct costs linked to absences. The types of indirect costs vary. They depend on how the gaps are filled. HR professionals in some industries, such as health care and retail operations, need to have boots on the floor or butts in the seats, Bass says. They are likely to offer overtime or add temps. Project-based operations, such as consulting and professional services, are more likely to coast and minimize additional costs.

The Mercer survey, similar to others conducted by the Disability Management Employer Coalition and the Integrated Benefits Institute in San Francisco, aggregates all employers and estimates average direct and indirect costs of all categories of absence at about 35 percent of payroll. That means a 500-employee company dedicates $10.5 million per year to dealing with absences, while a 5,000-employee company spends
$105 million.

Why the Inaction?
Most employers spend more money for people not to work than they think. And the impact goes well beyond lower productivity, lost revenue and decreased customer service. It gets to the heart of employee engagement, particularly if executives think they're treating all leave applicants comparably. Odds are they're not. How come?

Silos impede sharing. When responsibility for absence management is dispersed across departments, turf issues inevitably arise. Payroll, benefits, HR and risk managers all have involvement in the process. People "prefer to work in their comfort zones and not to share their data," says Dan Lyons, vice president and manager of national accounts for Liberty Mutual in Boston.

Plans overlap and meshing them can be problematic, Hudson adds. "Assume, for example, you had an accident in the parking lot at work in West Virginia, you lost fingers on your right hand, and your doctor authorized your claim for workers' compensation. In a siloed world, I would deny the claim because the accident did not happen while you were at work. End of conversation.

"In contrast, if the employee called us at our Recovery Center, we'd say, 'We don't believe you have a workers' comp claim, but here's what we can do for you. We'll start your sick pay and short-term disability pay and look into FMLA eligibility.' Because the injury is serious, he would qualify for 12 weeks of FMLA job protection, which would run concurrently. For the employee, it's one-stop shopping and he knows he's getting comprehensive advice."

Metrics are missing or underutilized. Many HR professionals are only beginning to collect the data they need to manage and benchmark leave. Others have the data but are not using it to the fullest extent. "We don't measure some HR-related activities sometimes because it's hard to do so objectively," Hudson says. "That's not true for absence management—the effects of integrated management are pretty easy to assess."

In June, the Society for Human Resource Management surveyed 302 members about their absence management practices. Eighty-two percent said they track absences or plan to track them in the next 12 months. Most said the purpose of tracking is driven by the need to be in compliance with state and federal regulations. Less than half track indirect costs.

How effective tracking is in ensuring compliance remains uncertain. In 2008, the year for which the most recent statistics are available, the U.S. Labor Department's Wage and Hour Division reported that 53 percent of the 1,889 complaints filed by employees for violation of the FMLA were valid. Back wages for the workers totaled $1.5 million.

Employers are gun-shy. When it comes to approving leave, employers are concerned about the potential costs of litigation when denials are challenged. "It's only a few days off," they reason. "Is it really worth a protracted legal fight?"

Paul DeCamp, a partner at Jackson Lewis LLP in Reston, Va., and leader of its Wage and Hour Practice Group, says employers grumble but usually give in. "Where you have these borderline issues, the dollar value is usually small, so the employer rolls over. The worker calls in, says, 'I think I have the flu.' If the supervisor says, 'No, you have to come to work,' he has to do the FMLA paperwork and refer them to HR. When HR gets the call, she thinks about calling the lawyer to figure out whether job-protected leave can be denied. Especially if the leave is unpaid, it's easier to let it slide.

"Any time workers can decide for themselves when they can't work, the employer is in a tough position," DeCamp continues. "Everyone accepts serious conditions under the FMLA like chemotherapy. But as conditions get closer and closer to the line"—such as chronic pain, headaches and severe colds—"they're more difficult to verify and there's more room for worker abuse. There's a real tension between wanting the employer to have a chance to verify versus the pushback from the doctor who says, 'I've already said this person has migraines, and I don't need to repeat my diagnosis.' "

Get Started
So how can HR managers best deal with absences and manage their costs?
Review internal policies. Look at your policies carefully. Are your leave policies serving you optimally? Look to best practices for effective leave strategies that you can control. For instance, employers that account for sick leave try to minimize the impact by:

• Requiring a doctor's note after a certain number of days.
• Requiring review by an independent physician.
• Accurately monitoring leave days taken, in a timely manner.

Most employers want to know when someone will be absent so they can consider coverage and check eligibility against the menu of mandated leaves that may apply. By qualifying an employee for a particular kind of leave, the employer may save money through insurance reimbursements and may track the days of eligibility each person has for a given leave such as FMLA.

Tear down silos. If you do not have integrated absence management, set up monthly meetings with risk, benefits, HR and safety professionals. You'll find a lot of the information you need to manage absences in different buckets.

Collect and analyze data. Build a database that you can benchmark against to support the business case. "When you're in a position to benchmark against yourself, you're on the right track," says Julie Norville, senior vice president of the National Absence Management Practice at Aon Hewitt Consulting in Atlanta. At a minimum, you should know:

• How many people are on leave.
• How many days of work you're losing on a full-time equivalent basis.
• How much you're spending to replace or compensate for absent workers.
• What units or jobs have attendance problems.

Once you've got the data, you can figure it per hundred employees; study it across units, offices and job titles; and look for trends, Lyons says.

Consider full or partial outsourcing. Nearly half of the respondents to the Mercer survey said they have integrated tracking and management of all types of absences in one department. Some do it themselves, developing their own software and systems, while others outsource it all. Still others adopt a mixed approach—outsourcing some leave categories and retaining others in-house.

According to the results of a 2010 survey conducted by Spring Consulting Group in Boston, 42 percent of mid-size and large companies were using outsourcers for some aspects of absence management. Outsourcing of FMLA administration has increased significantly during the past three years.

Companies in industries such as health care, where intermittent absences can cripple coverage, have been among early adopters of FMLA administration outsourcing. Kindred Healthcare, which has 46,000 employees and operates nursing, rehabilitation and assisted living facilities nationwide, outsources most of its leave management to an insurer. Employees who need to take leave call an 800 number. "We're dealing with the elderly and sick and have to be on top of our attendance on a daily basis," says Peter Corless, senior vice president of HR and administration at the Louisville, Ky.-based employer.

In general, vendors say giving them your business will, at worst, cost you what you're spending now for administration; at best, it will enable you to capture significant savings while limiting risk and improving customer service. For example, U.S. Bank had been administering absence management internally before choosing the outsourcing route with The Hartford. "We knew what it was costing to do it ourselves and found it more cost-effective to put it together under one vendor," Boller explains.

Relationships vary, with vendors tackling absence management from different perspectives. Some companies, such as Kronos Inc., specialize in payroll and time management as well as absence management. Insurers such as Liberty Mutual and The Hartford, HR benefits providers like Aon Hewitt and Mercer, and third-party administrators such as the Reed Group and Matrix Absence Management Inc. of San Jose, Calif., offer integrated solutions.

Vendors will tailor their services by selling software, services or both. Costs vary, depending on the vendor. Most vendors price services on a per-person-per-month rate. Depending on the leave coverage you're seeking, the average cost is $1.50 to $3.50 a month per person.

Seek robust claim reviews and administration. Outsourcers say they are tougher and more persistent. "We will deny more leaves than an average employer," says Mercer's Bass. "Our denial rate is 25 percent. Most employers deny 10 percent." Bass cites a situation where Mercer found a health care client with 55,000 employees to have unnecessarily approved 1,540 of 7,700 leaves. The cost difference between tolerating absences and managing them was  $4.6 million in the first year.

"We pick up situations that would be undetected, unmanaged, and where employees are misusing or abusing leave," says Marge Savage, director of total absence management at the Hartford Group Benefits Division in Simsbury, Conn. "The employee says, 'I'll be late because my child is sick,' and the HR person doesn't push back. When they call us, we say, 'Tell us which child is sick. We'll need a doctor's certificate on file that says he has a serious medical issue.' "

Such systems may help employers home in on patterns of potential abuse. "It will show you what people are claiming," says Joyce Maroney, senior director of customer experience and services marketing at Kronos in Chelmsford, Mass. "If you have a policy, [a system] will apply it equitably. It doesn't capture deliberate abuse, but by managing the data it gives you information that tells you where absence is occurring, what days of the week, and whether people are leaving early on certain days."

Confidentiality issues surrounding the Health Insurance Portability and Accountability Act constitute another reason to consider outsourcing medical leaves. "The outsourcer provides a firewall between you and the medical information your employees have provided," Boller says.

In addition, the cutting-edge knowledge that vendors can provide can be hard to replicate in-house. "When you're in 50 states, making sure you have the expertise to understand the FMLA and all the state issues as well as having the medical resources available is essential," says USAA's Pasa. "We already had a call center in place, but the expertise we needed was lacking."

Target training. Consider training and certification for your HR staff. The Disability Management Employer Coalition and the Insurance Educational Association in Orange, Calif., offer a three-course online training program that leads to a certified professional in disability management designation. Tuition is $195 per course. Currently, 667 certified disability managers are in the workforce.

Though their responsibilities should diminish in an integrated absence management system, supervisors still need training and regular updates. At 22,000-employee USAA, for example, managers are required to complete online courses that cover the FMLA, the Americans with Disabilities Act and military leave. In addition, Pasa's unit provides 90 minutes of face-to-face training for supervisors

Tough sell: The cost of switching to integrated absence management.

Employers that have a unit dedicated to absence management need to get people using the system up to speed and keep them current. At American Electric Power, "In the first year, they learn the database and what questions to ask when someone calls," Hudson says. "The second year, they start to understand the intricacies of the various leaves and programs. They move from being transactional to grasping the coordinating" responsibilities.

Move Incrementally
Despite a strong financial argument, convincing top executives to take on the initial costs of switching to an integrated system can be a tough sell. Carruthers recalls a major failure at a California utility that tried to do too much too quickly.

Lyons recommends an incremental approach: "It allows you to measure, evaluate and adjust as you go forward. No doubt, there is some value to just tearing the Band-Aid off and jumping in, but when you do it all at once, there can be communication and evaluation issues."

Some HR professionals begin with problematic job categories or titles where there may be a lot of absence claims. They focus on them for a couple of years. Then, if they're effective at cutting costs, they move on to another group. Others look at absences by leave program. They may hire a vendor to manage FMLA leave and see if the results increase efficiency and cut costs. Later, they integrate workers' comp or other forms of short-term disability.

Plan Ahead
Effective absence management is a delicate balance of competing interests. "Life happens; people get sick, pregnant, called to military duty," says Marlene Dines, director of work absence management in the HR Service Center Operations at Kaiser Permanente in Alameda, Calif. "We must find ways to balance the support we want to provide for employees who aren't here with the operational needs to keep our 24/7 health care life-saving activities going."

So, in painting a return-on-investment picture that will interest the C-suite, don't undersell the many nonmonetary advantages of integrating absence management. From an administrative perspective, it is the best way to maintain the balance Dines describes.
Even if you just break even, the many other benefits for your company and its employees should tip the scale in favor.

The author, a contributing editor of HR Magazine, is a lawyer and a professor of management studies at Marist College in Poughkeepsie, N.Y.

DISCUSS YOUR ABSENCE MANAGEMENT PROBLEMS AND BEST PRACTICES

Do you manage absences in your company? What tools or techniques are you using that prove particularly useful? Please share these with your peers.

How have managers and employees responded to the changes in the way you manage absences?

Have you demonstrated significant savings through absence management?

If you are not using any specific tools and techniques to manage absences, what roadblocks stand in your way?