Evaluating the Full Financial Impact of an OSHA Citation is Key to Determining Whether and How an Employer Should Contest It
Aug 24, 2017 QuickCounsel Download PDF
By Mark S. Dreux
OSHA citations can be deceptive. Even when the proposed penalty in the citation appears to be insignificant, the citation can still be end up being extremely costly. Employers should evaluate the potential financial impact the OSHA citation could have on their company, and from that evaluation, decide whether to challenge the citation or settle it on a reasonable basis. This article will outline the major issues that each employer should consider in evaluating the full financial impact of a citation upon the company.
Some factors like the proposed monetary penalty are straightforward to calculate. But there are five other factors that depend on the specific facts of each case and need to be evaluated carefully in order to assess the potential financial impact of the citation. Those factors are: 1) the cost in time and capital to abate the alleged hazard(s) in the citation; 2) the impact that the OSHA citation could have upon collateral litigation, parallel regulatory inspections and any relevant indemnification provisions; 3) the potential for OSHA to issue repeat citations in the future; 4) whether the citation is characterized as a "willful" violation; and 5) the impact that the alleged safety violations may have upon the company in competing for new projects or work.
By considering these factors, an employer can estimate the total potential financial impact of the citation upon the company and allocate appropriate resources to defend it.
The Required Abatement Actions
As a matter of law, an employer must abate every citation it accepts and later certify to OSHA in writing its full and complete abatement. One of the first questions that should be asked is "what, from OSHA's point of view, must be done to abate the hazard or violative condition in the citation?" Many times, the abatement is straightforward and inexpensive, such as providing training to a few employees on a new procedure. Frequently, however, OSHA asks for changes in work practices, equipment or materials of construction. For example, abating an ergonomic citation may involve reducing a line speed. Abating a PSM citation may involve installing a blast-resistant building or replacing all carbon steel pipe with a more expensive grade of steel. Reducing a line speed reduces the rate of production which directly affects revenues. Installing blast resistant buildings and upgrading steel piping are extremely expensive capital projects, which greatly influence the actual financial cost of the citation.
The Impact that OSHA Citations Can have on collateral Litigation, Parallel Regulatory Inspections and Indemnification Provisions
OSHA citations can have a significant impact upon collateral litigation such as civil litigation, workers' compensation proceedings, parallel regulatory inspections, and indemnification provisions.
Assume that a host company hires a welding company to do some welding and the contract has an indemnification clause. The safety representative of the host company writes a hot work permit to authorize the welding and, unfortunately, a significant fire occurs and the welder and one host employee are fatally injured. OSHA conducts an investigation, concludes that the hot work permit was inadequate and issues a serious citation for an inadequate hot work permit against the host company. In our litigious society, it is usually only a matter of months before the welder's estate brings a wrongful death suit against the host company and a workers' compensation claim for death benefits against his own employer, the welding company.
The permit and the OSHA citation will have a significant impact on the wrongful death suit. In court, the estate will argue that the OSHA standards on hot work defined the standard of care that should apply in the civil litigation and that the issuance of an OSHA citation for an inadequate hot work permit proves a violation of that standard. In closing arguments to the jury, plaintiff's counsel would argue that OSHA's citation is the opinion of the only neutral and independent expert to testify and its opinion concerning the inadequate hot work permits establishes negligence.
Most contracts have indemnification clauses, and in many indemnification clauses, employers agree to indemnify another entity to the extent that their own negligence, error or omission has caused damages. OSHA's citation for the welding incident would allow the welding company to argue that the host employer, which received the citation, was negligent and liable under the indemnification clause. The welding company has paid a death benefit to its employee and will consider whether to seek indemnification from the host employer for the death benefit under the contract. The OSHA citation for the inadequate hot work permit will have a significant role in any dispute over indemnification.And, a "willful" citation can have even more pronounced effects, discussed in Section 4 below.
Many employers have manufacturing operations that are regulated by the Environmental Protection Agency (EPA) as well as OSHA. OSHA citations can also affect an EPA investigation. Assume a petrochemical facility has a significant incident and OSHA conducts an inspection and issues citations under its Process Safety Management (PSM) Standard, 29 CFR § 1910.119. For such petrochemical incidents, EPA frequently conducts its own inspection under its Risk Management Plan (RMP) rule, 40 CFR § 68.1, which is virtually identical to OSHA's PSM standard. The OSHA PSM citations, especially if accepted in a settlement agreement, become a road map for the EPA inspection, leading to significant environmental compliance issues.
While the collateral litigation, indemnification and EPA inspection issues are very fact-specific, they can be dramatically impacted by an OSHA citation.
Potential for Repeat citations
OSHA has a national repeat citation policy in which repeat citations can be issued to any of a company's U.S. facilities based on an initial citation issued to only one of them. OSHA defines a repeat violation as one in which an employer receives an OSHA citation that becomes final through settlement or litigation, and then receives a second, separate OSHA citation involving a substantially similar hazard to the first citation at any other of its U.S. facilities. OSHA has the discretion to characterize this second substantially similar citation as a "repeat" violation and propose a penalty of up to $126,000. The physical location of the first citation has no bearing on the characterization of the second citation as a repeat violation as long as both locations are within the company's U.S. corporate network.
It's easy to imagine how potential costs can quickly escalate under this system, especially where an employer has multiple locations. Years ago, one of my clients, which had 67 facilities across the nation, received an eye wash citation from OSHA at its Massachusetts facility with a proposed penalty of $700. The penalty was so small that the client just paid it without discussing it with its legal department. Two years later, one of the client's facilities in Illinois received two repeat citations for inadequate eye washes based on the original Massachusetts citation. The repeat penalty today would be $252,000.
OSHA's repeat policy is a national policy so employers need to consider each OSHA citation from a broadened, corporate perspective, and not as a separate, local independent issue. Employers should be asking "how likely is this hazard to be repeated at other facilities?" and "can a corporate policy be implemented to protect employees and prevent the hazard from recurring?
The "Willful" Citation
Occasionally, OSHA issues a citation that has been characterized as "willful," meaning that the employer has knowingly and intentionally disregarded the requirements of law. OSHA puts more resources into prosecuting a willful citation and the resulting adjudication can change a company's relationship with the agency for the worse with respect to future inspections. OSHA can come to see the company as a "bad actor" which makes future inspections and citations more likely and subsequent litigation more costly.
Assume that the OSHA citation in the welding company example in Section 2 was characterized as "willful." This opens the door to claims for punitive damages in the welder's wrongful death suit. For the company employee who was also fatally injured, the willful citation may enable him to opt out of the workers' compensation system and bring his own wrongful death claim, also seeking punitive damages.
A willful citation also damages the public perception of the company. To the employees, the neighboring community, the shareholders, the media and other agencies such as EPA, a willful citation is a red flag suggesting that a closer examination of the safety and health culture might reveal more compliance issues.
Even though prosecution is rare, a willful violation of an OSHA standard that causes an employee's death is a criminal violation of the federal OSH Act. A willful violation can also raise issues in collective bargaining and in dealing with insurance companies, and it can negatively impact a bid for new business. As noted previously, it can also change civil litigation raising issues over punitive damages and allowing employees to circumvent the workers' compensation bar and sue their employer outside of the workers' compensation statutory scheme.
The Impact of Safety Violations and Competing for New Projects
In some industries, an employer's safety record is an important factor in the competitive process for new business. The question that frequently appears on bid documents in these industries is "have you had any willful, repeat or serious OSHA citations in the previous three years?" If the answer is yes (and note: this question is not limited to "willful" violations), then your ranking in the competitive process is lowered and may hurt your chance of winning a new contract. In some industries, the competition is so fierce that companies will not accept a serious citation from OSHA. Instead, they litigate and strive for a settlement that will not affect their competitive position.
A proper, cumulative evaluation of the potential financial impact of an OSHA citation considers not only the proposed penalty, but the five factors mentioned in this article. Some citations pose little to no financial risk while others pose significant expense. Once this evaluation has been conducted, the company can then make a business decision about whether or not to contest the citation and determine the appropriate amount of resources needed to properly defend against it.
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