Wednesday, 3 October 2012

Cost Benefit Analysis – The Financial Side of Workplace Health & Safety



Many business owners and managers are familiar with the concept of a cost benefit analyses. For those who are not, in its most basic form, it is a review of an investment to ensure return (or benefit) outweighs its cost. While this may seem like an elementary rule for business, when the investment is in safety the workplace health and safety guidelines can become blurred.

An example which comes to mind is the now infamous ‘Ford Pinto Memo’ in the US. During the 1970s the Ford Pinto had a problem with its fuel tank which caused it to occasionally burst into flames during a rear collision. It is claimed that Ford knew of this engineering fault, however calculated that the cost of the resultant claims of the fault, would be less than the cost of ordering a recall of the cars to fix the fuel tank. It is claimed that 24 people died as a result of fires in the Pinto.

You may also be surprised to learn that the aviation industry uses a similar formula when determining whether to issue mandatory safety improvements (known as airworthiness directives) to airlines, following a plane crash. The civil aviation safety authority (CASA) website, spells out a procedure on conducting a cost benefit analysis for “economic evaluations of airspace change proposals (ACPs)”, of which airworthiness directives are included. The unsettling thought being that aircraft are flying today with known defects, which have not been corrected as the cost of a mandatory fix would cost the industry more than the resultant compensation.

So the obvious question for business owners and managers … if addressing a hazard will cost me more than paying increased workers compensation premiums as a result of injuries incurred, do I have to fix it ?
According to the Occupational Health and Safety Regulation (NSW) 2001, Sec 11 states an employer must eliminate any foreseeable risk to health and safety. If it is not reasonably practical for the risk to be eliminated, it must then be controlled. From interpreting this clause, a cost benefit analysis could potentially be part of determining whether it is reasonably practical to eliminate the risk. For example, a small business identifies a minor risk to work health and safety [i.e. not likely to occur and if it does occur not likely to cause significant harm], and determines it will cost 15% of annual profits to eliminate. It could be argued that the associated cost of elimination is not reasonable. On the other hand if the risk was assessed as being major [likely to cause significant harm or death], the expenditure of 15% of annual profits could be seen as reasonable.

Looking at more than financials, any owner or manager who merely relies on a cost benefit analysis to determine workplace health and safety obligations runs the risk of failing to show the required level of due diligence under existing legislation and adopted in the harmonised laws from 1 January 2012. From 1 January 2012, individuals can attract penalties of up to $300 000 and 5 years imprisonment for such a breach.

The concept of reasonably practical is a complicated area and one not to be taken lightly. However one question to ask yourself is…could you sleep at night knowing you could have done more to removed workplace health and safety dangers to prevent a death or serious injury at your workplace?

1 comments:

Bariah Chaz said...

It is important for business organizations to reduce safety risks at workplace. Your new interesting suggestions about workplace health and safety entail a great deal a person like me and somewhat more to my mates.
Occupational Health and Safety WA

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