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December 12, 2008
What Are Employee Absences Costing You?
The costs of employee absence average 36 percent of base payroll. That’s among the major findings of a new survey on the financial impact of employee absences.

The Mercer survey, conducted among 455 organizations, found that direct costs (such as pay provided to an employee for time not worked) and indirect costs (such as replacement labor expenses and lost productivity) of employee absence average 35.8 percent of base payroll. Most of these costs (26.6 percent) are attributed to “planned” absences, such as vacations which have likely been approved in advance.

However, “unplanned incidental” absences—such as casual sick days—account for 6 percent of payroll. These type of absences result in the highest net loss of productivity per day “i.e., work that is missed or postponed by not being covered by others” according to the survey. While the direct costs of incidental employee absences are just 2 percent of payroll, the total costs (including the indirect costs of replacement labor) were three times as high at 6 percent, according to Mercer. About one third of respondents use paid time off (PTO) banks that combine vacation and incidental sick days to help manage incidental unplanned absences.

The survey further found that “extended” absences—those that are unplanned and last more than one week—account for 3.2 percent of payroll. These two categories—unplanned incidental and extended absences, account for 9.2 percent of payroll—representing more than half the cost of healthcare, which is about 15.4 percent of payroll, according to Mercer.

Using the example of a company with 1,000 employees with an average annual salary per employee of $50,000, 9 percent of the $50 million payroll—for unplanned incidental and extended absences—would be $4.5 million in costs per year.

So what can be done?

Mercer and Kronos, who sponsored “The Total Financial Impact of Employee Absences” survey, say that employers should focus on 3 areas in order to improve the situation: 1) Plan design and policies, such as benefit level and attendance policies; 2) Absence management and administration; and 3) Tackling the underlying causes of employee absence.

For absence management, Mercer and Kronos suggest that, among other things, employers should streamline processes, centralize recordkeeping, carefully monitor absences and consistently enforce policies, and monitor performance management of disability and workers’ comp vendors. Employers can tackle the underlying causes of employee absences by seeking to determine if they are health-related, tied to other outside circumstances, or affected by employees’ commitment to their managers and the organization.

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