Over the past year, employers nationwide have been lamenting a shift in focus at the Occupational Safety and Health Administration (OSHA) from education, outreach and partnership to one that emphasizes enforcement, compliance and penalties. The administration has sent a message to employers that it plans to crack down on OSHA violations with a one-two punch: first, by stricter enforcement of existing laws; and second, by passing legislation that would amend OSHA rules to expand coverage to more workers, increase penalties for violators and raise protections for whistleblowers.

The government's fiscal year 2010 budget calls for a 9.9% increase in OSHA's budget. The funds will be used to pay for 130 new OSHA inspectors and set aside $227.1 million for enforcement programs, compared to a federal compliance assistance budget of just $73.4 million. "The Department of Labor is back in the enforcement business," said Secretary of Labor Hilda Solis.

Nowhere is this transformation more clear than in the significant increases in penalties soon facing employers. Under the Proposed Protecting American Workers Act (PAWA), civil penalties will increase from a maximum of $70,000 per violation to $120,000. And if an employer with 100 employees fails to meet new training requirements, the resulting fine, rather than being $5,000, could now be as high as $500,000 under the "per employee rule." Even with just the smaller $5,000 fine, a company that earns 4% in net profit on sales would have to make $125,000 just to pay the fines.

Why does this renewed focus on safety matter? At the most basic level, poor safety programs hurt the bottom line. They lead to accidents, fines and higher workers compensation costs. Conversely, strong safety programs help decrease losses, lower insurance costs and improve productivity. 

The challenge for risk managers is how to develop a better safety program in an environment crippled by an uncertain economy and with a government agency that is more intent on compliance and enforcement. To improve safety programs, ensure compliance and safeguard the integrity of the organization, everyone from senior management to front-line employees must understand the dynamics of today's regulatory climate and be willing to take the steps to ensure a strong safety program. 

Today's Safety Challenges 

Compliance, training and injury prevention are now a major priority for business. There is good news and bad news on this front. More than 90% of injuries are caused by unsafe acts that could be prevented with proper education and training. But these unsafe acts are just a symptom of the real problem: the failure of management to implement and enforce an effective safety program.  

It is not simply a matter of blaming management though. The vast majority of employers strive to reduce accidents and improve safety. They clearly recognize that without a healthy workforce, productivity falls and costs can skyrocket. But over the past 18 months, many employers have been forced to scale back on safety programs, lay off loss control personnel and reduce investment in safety equipment simply to survive. What employers need are insights into why safety programs must not be sacrificed, and how to develop and implement programs with fewer resources.

From a risk management perspective, safety and loss control programs play an integral role in insurance program strategies. To be effective in today's market, risk managers need assurances that their programs work. Risk managers cannot take the plunge of higher loss retention, and the potential to create additional risk for an organization, unless they are able to say with confidence that the organization can control the frequency of losses and predict financial outcomes.  

When companies start reducing safety programs, risk managers are forced to review possible adjustments to the risk retention of insurance programs. They may need to transfer more risk to the insurance carrier, thus increasing bottom line costs.  

All accidents result in losses. From a "micro" perspective, some losses are insured and some are uninsured. Of course, uninsured losses come directly out of the company's bottom line. If the uninsured cost of an accident is $10,000 and the company's profit margin is 4%, $250,000 in sales is needed just to cover the cost of a single accident.  

The macro effect of accidents, on the other hand, can be seen when exploring the issue of experience modification (the ratio of actual losses to expected losses). If losses are above average, the mod will be greater than 1.00. If losses are lower, the mod will be below 1.00. The experience modification is multiplied by the premium to generate a surcharge for mods over 1.00 or a credit for mods less than 1.00. If a company has higher-than-average losses over an extended period of time (say, three years), it will pay more for workers compensation insurance. 

For example, if the organization's experience modification is 1.24, you pay 24% more than the standard premium ($100,000 standard premium x 1.24 = $124,000). If the experience modification is 0.76, you pay 24% less than the standard premium ($100,000 standard premium x 0.76 = $76,000).

While understanding the micro and macro impact of workplace injuries is important, of the two, the uninsured costs are the more insidious for employers. The experience modification results in an actual stated dollar cost that can be seen by risk managers within a financial context. The uninsured costs are chipped off, a little bit at a time, and hidden in daily production and repair costs, making them much more difficult to quantify.

The next few years will continue to challenge employers. The economy will likely remain uncertain, adapting to new OSHA guidelines will be challenging and budgets will shrink-all forcing employers to adjust their safety programs. Those risk managers who understand the realities of the market and the cost of poor safety programs will be able to manage risks, lower costs, improve productivity and, ultimately, help their organizations succeed while ensuring the safety of their workforce. 

Written by Rick Stasi. Rick Stasi is chief operating officer for the alternative risk division of Avizent, a national claims and risk management service provider based in Columbus, Ohio.

The above article is reprinted from the May 2010 edition of Risk Management Magazine.