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How to calculate the real cost of employee absence

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How to calculate the real cost of employee absence

March 18, 2021

Here’s an eye-catching stat from a recent Morneau Shepell study on workplace absenteeism in Canada: 90% of employers believe that absenteeism is “very costly” yet only 52% say it constitutes a real “problem” for their business.

Maybe that’s why less than 40% even bother to track the cost of absenteeism in the first place. The prevailing wisdom seems to be: absenteeism costs are high, but there’s nothing I can do about it. It’s just the cost of doing business.

The truth is that for many businesses absenteeism is a serious problem. Studies suggest it accounts for up to 5% of total payroll in the private sector and even higher in the public sector. And in most industries these costs are growing because of various factors: the aging population; rising health and medication costs; and increased diagnoses of mental illness.  

But here’s the good news: a proactive approach to managing absenteeism can save you big money. The first crucial step is to calculate as clearly as possible the true cost of absenteeism to your business.

When we start working with a new client, here are the factors we consider in our assessment:

Direct costs

  1. Salary/payroll costs  
  2. Overtime costs to cover for absent employees
  3. Insurance premiums and costs related to absence
  4. Short term disability (STD):
  5. If you’re on a salary continuance model, count salaries paid to employees on STD
  6. If that’s not measured, multiply average salary by average STD duration
  7. Administering and managing Workers’ Compensation (WC) and STD either internally, through a third party or an insurance carrier
  8. Workers compensation premium paid to your provincial board
  9. Your long-term disability (LTD) insurance costs

Indirect costs

While they vary from one company or industry to the other, or even between departments, indirect costs are very real and impactful, typically ranging from 50% to as high as 500% of direct ones. Here the main inputs we look at:

  • Replacement costs: recruiting, training and integrating a new or temporary employees
  • Management costs: time and effort spent by people leaders to manage the effects of absence and replacement
  • Productivity loss: work not done because of an absence
  • Client services costs: problems or penalties caused by delays or lower service standards
  • Employee morale: psychological costs on employees who have to pick up the slack with a heavier workload

There are various methods for calculating indirect costs – you should ask your service provider for assistance – but it’s essential to do so to get an accurate picture of the overall cost of absenteeism to your business.

In the end, calculating these costs isn’t just about managing and reducing expenditure. You’ll gain real insights to support your employees and improve your culture as well. But to get there – and to tap the substantial ROI potential of absence management – you need take this crucial first step.