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Why Do You Need a Safety Management System (SMS)?

By Andrew McKenzie, CRSP
Last updated: May 6, 2023
Key Takeaways

A safety management system isn't just a way to protect your employees. It's also an important aspect of running a successful business.

Senior management often question whether their organization needs a safety management system (SMS). The short answer to that question is: yes, absolutely. But to provide more clarity, let's spell out exactly why an SMS makes sense from a business standpoint.

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Specifically, we'll cover four reasons to consider safety when building a business plan:

  • Safety ethics
  • Legal responsibilities
  • Financial costs
  • Competitive advantage

Safety Ethics

Starting with ethics, we must ask ourselves “what is our corporate responsibility?” Or more simply put, what do we owe our:

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  • Employees?
  • Customers?
  • Shareholders?
  • The community at large?

Ethical values and legal principles are usually closely related. However, they do not always overlap. In some cases, the law permits actions and decisions that may not be ethical.

This can result in safety dilemmas, such as:

  • An employer downplaying a serious safety hazard brought forward by a member of the supervisory staff because it will cost too much to remedy or will interfere with production
  • An employer requesting the results of an internal safety audit be altered to indicate a more positive result

Some organizations also have a long history of being more concerned with due diligence or "covering their butts" than with the health and safety of their people.

The consequences of unethical safety behavior can include:

  • Property damage, such as damage to equipment, buildings, or storage systems
  • Loss of the company's good reputation
  • Financial losses due to a loss of business and goodwill
  • Serious injury or the loss of a life

David L. Goetsch, a recognized leader in Management, Leadership, and Occupational Safety, has created helpful guidelines for ethical decision-making:

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  • Apply the morning-after test: if you make this choice, how will you feel about it tomorrow morning?
  • Apply the front-page test: would you or the company be embarrassed if your decision was printed on the front page of a newspaper?
  • Apply the mirror test: if you make this decision, how will you feel about yourself when you look in the mirror?
  • Apply the role-reversal test: if you were to trade places with the people affected by your decision, how would you view the decision?
  • Apply the common-sense test: listen to what your instincts and common sense are telling you – if it feels wrong, it probably is.

(Learn more in 3 Ways to Become a Safety Leader)

There are a number of legal requirements associated with health and safety. In Canada the most important requirements are laid out in:

The latter now includes an offense called "Occupational Health and Safety Criminal Negligence," which states that criminal negligence is committed when a person performing any duty or omitting to perform any duty required by law shows wanton or reckless disregard for the safety of others. In short, anyone who directs how another person does their work (from senior management down to a lead hand) can be charged for the reckless disregard of the health and safety of the worker.

While these are specific to Canada, similar legislation is also in place in other countries. Implementing a safety management system can ensure that your organization conforms to these legal requirements and avoids the fines and penalties that result from violating them.

Financial Costs

So, what are the financial implications of safety in the workplace? They include:

  • Worker Compensation Assessments, which are your insured costs
  • Associated costs of incidents
  • Costs associated with safety program development

As mentioned, assessments are your insured costs and like most other insurance the rates are based on your performance. Meaning your rates will go down if you go a long time without a reportable claim, while your rates will increase the more claims you have.

The following examples are often used in calculating assessments:

  • Base Rate: the rate a new employer would pay per $100 of assessable payroll (this can be thought of as the zero mark)
  • Rebate: when the assessment rate drops below the base rate after a period of time with no reportable claims
  • Surcharge: when the assessment rate increases beyond the base rate due to reportable claims (this amount can climb to 100% or higher of the base rate if changes are not made to prevent workplace injuries or illnesses)
  • Experience Rating: the percentage of rebate or surcharge a company is currently paying based on their claims history over the past X years.
  • Net Rate: the dollar amount per $100 of assessable payroll based on a company’s experience rating
  • Premium: the amount of assessment paid to the insurer

To illustrate, let’s assume an employer manufactures widgets at a base rate of $2 per $100 of payroll. The assessment would be calculated as follows:

  • Using a base rate of $2 per $100 of assessable payroll
  • Let’s assume that this employer has had a number of claims over the past three years and has a current experience rating of 23.5% surcharge.
  • This would mean that the employers current Net Rate would be $2.47 per $100 of assessable payroll
  • Let’s now assume that the employer has a $5 million assessable payroll per year
  • With this information we can use the following formula to calculate:
    • the Base Premium which would be $100, 000 per year at a 0% rebate or 0% surcharge
    • the Current Premium is $123,500 per year based on 23.5% surcharge

Now with that in mind, let’s have a look at the overall costs of an incident. As you can see by the illustration below, the insured costs are just the tip of the iceberg, and the uninsured costs can be a lot higher. For every $1 paid for compensation there can be $5 or more in uninsured costs, meaning these costs are not recoverable.

An iceberg illustration showing that for every dollar of insured costs (the tip of the iceberg), there are five or more dollars of uninsured costs (the submerged portion of the iceberg).

Insured costs cover such items as medical expenses, compensation paid to the workers, and insurance premiums paid as a result of making claims on equipment or property damages.

Uninsured costs (those not covered by any insurance) can include:

  • Injured worker time: time that must be paid to the worker for what remains of the day of injury
  • Co-worker time: overtime and replacement worker wages paid in order to replace an injured worker, as well as time lost through sympathy, curiosity, and work interruption
  • Incidental time lost due to clean-up and review hearings
  • Time spent by the supervisor investigating the incident, training a replacement staff member, or putting together a return-to-work agenda
  • General loss of monies due to:
    • Claims costs
    • Replacing and training a new worker
    • Production loss due to investigations
    • Clean-up and repairs (if required)
    • Production slowdown upon worker's return
    • Loss of good-will due to the incident (the incident will be published if it is severe enough)
  • Property loss: equipment that cannot be insured or replaced due to age, obsolescence, or overall replacement costs
  • Other losses: including penalties, fines, and citations

(Learn about The 5 Expenses You'll Avoid by Investing in Machine Safety)

Competitive Advantage

Most businesses are primarily about making a profit, and a business that is not profitable will not stay in business for very long.

Incidents, especially those with long periods of lost time, cut directly into profits, making them a competitive disadvantage.

Companies that have a good safety management system in place and manage their claims will see an overall decrease in losses due to workplace incidents and illnesses, while seeing an overall increase in profit compared to a similar company without an SMS in place to prevent losses due to workplace incidents.

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Written by Andrew McKenzie, CRSP | Environmental Health & Safety Professional

Andrew McKenzie, CRSP

Environmental Health and Safety Professional with 20+ years of Occupational Health, Safety, Environmental and Hygiene experience in various industries including manufacturing, construction, and occupational hygiene. Skilled in Workplace Safety, Administration, Program Development, Team Building and Mentoring, Safety Management Systems, and Story Telling.

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