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The total cost of employee absences, unplanned and planned, is as much as 36 percent of payroll, or more than twice the cost of health care, according to new research by Mercer, a global consulting and outsourcing firm.
Society for Human Resource Management (SHRM) members received a preview of Mercer’s forthcoming survey, Total Financial Impact of Employee Absences, during an Oct. 9, 2008, SHRM webcast led by Michael Klachefsky, the national lead for absence management practice at Mercer.
According to Klachefsky, Mercer gathered detailed data from 465 companies in a cross-section of industry groups and company sizes in an effort to quantify the cost of employee absence and other consequences of absence, such as the administrative burden on supervisors and HR staff.
Types of Absences and Their Costs
The survey looked at three types of absences: planned absences, such as vacations and holidays; incidental unplanned absences, such as sick days and personal emergencies; and extended absences lasting more than five days, such as short-term disability and FMLA leave.
HR professionals seeking support for an absence management strategy targeted at unplanned absences need compelling data about the costs of absence. But Klachefsky said that previous attempts to quantify such costs have focused on only a portion of actual costs.
Mercer therefore focused on the total cost of absence, which Klachefsky said consists of direct and indirect costs.
Direct costs are the easiest to quantify, he said, and consist of “the benefit paid to the employee to provide income during the absence.” These include things like paid sick leave, holidays and vacation time as well as short- and long-term disability benefits paid by the employer or an insurance carrier.
Mercer found the average direct cost of absence equals 12.2 percent of payroll, consisting of 9.6 percent for planned absences such as vacation, 2 percent for incidental unplanned absences and 0.6 percent for extended absences such as FMLA and disability leave. Workers’ compensation absences and costs were not included in the survey.
Klachefsky noted that the direct cost of incidental unplanned absences is highest for union hourly workers at 2.6 percent of payroll and lowest for exempt workers at 1.5 percent of payroll.
But the indirect costs “represent the real impact of absence,” Klachefsky told webcast participants. Indirect costs result when work is delayed, co-workers and supervisors are affected or temps are hired as a result of an employee’s absence.
Mercer found that the average net indirect cost of absence is nearly 24 percent of payroll, made up of 17 percent for planned absences, 4 percent for unplanned absences and 2.6 percent for extended absences.
Again, these figures vary based on type of position. Union hourly workers’ unplanned absences cost an average of 6.7 percent of payroll compared to 4.8 percent for nonunion hourly workers and 1.8 percent for exempt workers.
When direct and indirect costs are combined, the average total cost of absence equals 36 percent of payroll, or more than twice the average cost of health care reported elsewhere by Mercer, Klachefsky noted.
A company with 1,000 employees paid an average of $50,000 per year would have a payroll cost of $50 million. If the total absence cost mirrors the average of 36 percent identified by Mercer, this company could have a total absence cost as high as $18 million when all types of absences are factored into the calculation:
1,000 employees x $50,000/year pay = $50 million payroll cost
$50 million x 0.36 = $18 million total absence cost
When planned absences for desirable benefits such as vacation time and holidays—which average 27 percent of payroll—are removed from the calculation, this sample company would have a much lower, but still high, total absence cost of $4.5 million.
$50 million x 0.09 = $4.5 million total absence cost
Even a modest reduction in unplanned absenteeism can result in tremendous savings for such a company: A 1 percent reduction in the cost of absence equals nearly half a million dollars.
Other Consequences of Absence
Klachefsky noted that lost productivity and the need for replacement labor are consequences of unplanned absences factored into the indirect cost calculation.
Replacement labor might take the form of temps, contract labor, overtime or floaters, Klachefsky said, or might be built into staffing levels in the form of extra headcount.
Mercer found that co-workers are the most common type of replacements used when employees have unplanned absences. This is particularly true in the case of exempt workers who rely first on co-workers and then on supervisors for coverage when they are out.
But co-worker coverage is not an ideal solution, Klachefsky said, because it can impact morale or the quality of the work product or can result in higher staffing levels as companies try to anticipate such absences. Replacement workers are less efficient, Mercer found, and require the equivalent of 1.25 people to achieve the same amount of work as the absent employee.
Although exempt employees can make work up when they are absent, Mercer found that exempt employees make up just 44 percent of their work when they have unplanned absences and 45 percent of their work when they have planned absences. Yet such makeup time still has a cost in the form of stress and poor work/life balance, Klachefsky noted.
Managing Incidental Unplanned Absences
Mercer found that employees take an average of 5.3 incidental unplanned absence days per year. Union hourly workers take the most, at 6.7 days on average, and exempts take the fewest, at 3.8 days on average. More than two-thirds of respondents (69 percent) noted that absences are highest on Mondays and Fridays. “A significant number of employees are taking sick time for what should be planned vacation time,” Klachefsky noted.
Centralized systems for tracking attendance are increasingly popular, Klachefsky said, but supervisors still spend considerable time—an average of 3.4 hours a week—managing absences, much of which is spent locating replacement workers to cover for absent employees.
Two-thirds of respondents said it is part of a supervisor’s job to enforce the attendance policy. That’s why Klachefsky urged participants to provide training for supervisors on how to enforce the policy and to hold them accountable for doing so. He said it helps to have someone with designated responsibility for the overall absence management program to aid supervisors in their efforts.
Rebecca R. Hastings, SPHR, is an online editor/manager for SHRM.
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