Uncover the Indirect Costs of Leave

When we think about the cost of absence, we may only be aware of direct costs related to budgeted items. For example, costs that are usually front and center include disability income replacement costs or the cost paid to a third party responsible for your FMLA administration. What’s missing is an understanding of indirect costs associated with an absence that may be hidden from view because they’re not considered or measured. In this post, we’ll begin to understand these indirect costs and how they can be measured.
Indirect costs can take multiple forms, but we’ll briefly discuss two of them:

  • Presenteeism
  • The cost of replacement workers

Presenteeism With presenteeism, employees are on the job physically, but their productivity is nowhere near 100 percent because they’re hampered by negative internal factors. It could be resentment over another employee’s frequent absence or dissatisfaction with their new duties under an accommodation. In some manner, projects are taking longer to complete, less product is pushed out the door, or service is subpar.

The cost of replacement workers Replacement workers come in many forms. A replacement worker could be a temporary employee hired to cover for an absent employee, an existing employee paid overtime to cover another employee’s shift, or a new employee hired due to turnover. In any case, the extra expense of paying the replacement worker when another employee is absent would also be considered an indirect cost. This type of expense can quickly become obtrusive, puts company productivity at risk, and could begin to erode the bottom line.

How do you measure these costs? Indirect costs must be measured, but measurement can be more of an art than a science. Some possible assessments include FMLA absences per 100 covered employees or the cost of replacing employees due to turnover. When measuring the incidence of FMLA, calculations can vary widely. Some have measured incidence per 1,000 covered employees, and others have measured incidence per 100 FTEs. Measuring FMLA absence per 100 covered employees appears more often in the research and is suggested for use here.

The most commonly referenced average is from an EMPAQ study for program year 2009, which indicates an average of 14.9 absences per 100 covered employees. While you might immediately want to compare yourself with this single-number point estimate average, it’s more effective to consider a range for average comparison purposes, similar to percent of voters likely to vote for a certain candidate. With that thought, it’s likely that if your measure of FMLA absences is between 12.4 and 17.4, you’re still quite comparable with the average of 14.9 absences per 100 covered employees.

Let’s now consider the cost of replacing an employee who has left the company. We’ll consider the cost of replacing employees from both a percentage and an average dollar point of view. The Center for American Progress published statistics in November 2012 from its review of over 30 case studies. This research indicated that the typical cost of turnover was 21 percent of an employee’s annual salary. Truly a burden on employers, this cost not only hampers the bottom line but is a strain on other employees until the new hire is onboarded into the organization. This average was also consistent across different pay levels, excluding the highest-paid employees.

When considering an average dollar cost of turnover, numbers will vary depending on the costs included in the statistic. Research does not necessarily separate direct costs from indirect costs. Indirect costs include recruitment, selection and training, and decreased productivity from current employees having to compensate. According to research from the Sasha Corporation, the average turnover cost for an $8.00-per-hour employee is estimated at $9,445. Excluding replacement costs that were significantly higher than the average, these estimated turnover costs drop to $5,506. Again, when comparing yourself to this statistic, it’s probably more appropriate to compare yourself to a range, say $3,500 to $7,000 for the typical average cost to replace an $8.00-per-hour employee. Either way, you can see that the cost of turnover will have a significant impact on your organization.

To truly understand the impacts of absence on your organization, these indirect costs must be recognized and measured.