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Hidden Employee Costs that Can Damage Your Business

When assessing startup costs, every business should take note of the "odd" or "hidden" costs related to its workforce. Here are some key employee-related costs every business owner should recognize.

When assessing startup costs, every business should take note of the "odd" or "hidden" costs related to its workforce. Failure to acknowledge employee expenses that range far beyond individual salaries and standard health benefits can result in significant financial setbacks, particularly in a fledgling company's early days.

Here's a look at some key employee-related costs every business owner should recognize:

Chronic Health Issues

According to the Centers for Disease Control and Prevention (CDC), losses in productivity attributable to personal and family health problems costs businesses in the U.S. $1,685 per employee every year, or more than $225 billion annually. Chronic diseases related to obesity alone represent expenses of up to $93 billion annually in health insurance claims. "In fact," the CDC notes, "indirect costs of poor health including absenteeism, disability, or reduced work output may be several times higher than direct medical costs."

For employees who smoke, the CDC estimates health-related costs to top $96 billion annually. A closer look uncovers these sobering statistics:

  • $4,430 a year in lost productivity for smokers (compared to $2,623 a year for nonsmokers)
  • 18.1 percent higher medical costs for smokers than nonsmokers

So what can employers do to try to offset these potentially crippling expenses? The answer may lie in providing a comprehensive wellness program that encourages active employee participation. According to researchers at Harvard, the most commonly offered (and generally most successful) wellness initiatives offered by employers are:

  • Health risk assessments and self-help health education materials
  • Professional health care counseling or on-site group activities led by qualified staff

In addition to promoting good health, a robust company-sponsored wellness program can attract and retain employees, and boost the standing of an employer's brand among qualified job-seekers.

Workplace Safety

Workplace injuries are another area where businesses can incur unexpected costs. Regardless of the type of business you run, employees may be at risk for some type of injury—or, in the most extreme cases, death. The U.S. Bureau of Labor Statistics, U.S. Department of Labor reports that 4,585 employees lost their lives in 2013, while more than 3 million accidents and illnesses were reported, with about 95 percent of them being accidents. Disabling injuries involving a week off or longer cost employers in excess of $53 billion annually in workers' compensation costs alone.

Direct costs include workers’ compensation payments, medical expenses, and costs of legal services. There could also be indirect costs, such as for training replacement employees, investigating accidents, implementing corrective measures, lost productivity, repairing damaged assets, and costs associated with a drop in employee morale and increases in absenteeism.

"Businesses often have good safety programs on paper," note Paychex safety representatives Jim Bartasevich and Laurel Ferguson. "Yet these activities don't lower their employee accident frequency and/or severity rates, or their workers' compensation insurance costs." Why? Because the company and its employees are neither committed nor empowered to work together to address conditions that can lead to workplace accidents.

Businesses must recognize that unless supervisors and managers make workplace safety a top priority, it won't rank highly with employees either. To make a genuine change in your culture, make sure your safety programs are all up to date and reward employees who identify workplace hazards or otherwise encourage their co-workers to always think, "Safety first!"

Tardiness and Absenteeism

Startup costs can escalate when employees are either late for work or fail to show up at all. Not only is there a loss of productivity in these cases, but frequent absenteeism and tardiness can damage workplace morale. Employees who have to pick up the slack for those who are chronically late or absent quickly may come to resent their co-workers, as well as management, when it tacitly permits such behavior.

Time and Attendance Systems

Precious time can also be lost through an inadequate time and attendance system. If your employees are taking too long to complete time entries, or they are making mistakes that result in payroll errors later on, your business is losing money.

Time-collection options, including badges, biometric readings, keypads, Web entries and smartphones, can help reduce lost-time instances and boost employee productivity. These solutions can be integrated with your payroll service and offer built-in workflows.

The costs of owning and operating a business are high enough without incurring additional (and often needless) expenses. Taking care of employee health and safety and maintaining accurate time and attendance systems may result in significant business savings over time.


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This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.

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