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The man was losing it, and his boss —call him "Sam" —was not looking forward to dealing with the situation.  For years, this employee —let's call him "Jim" —had been a much-trusted supervisor at the small outfit.  Lately, however, he had begun acting bizarrely, going off on strange tangents at meetings.  Jim's customary competence had eroded badly, while his output had slowed to a crawl. 

"Jim's erratic behavior was having a huge ripple effect," the executive recalls.  "It led numerous other employees to become upset and disgruntled."  But given Jim's track record and the high cost of replacing him, "termination was unthinkable."

If you doubt there will ever be someone like Jim on your payroll —and that his problems will affect the company —you're in denial.  The massive report on mental health issued in December by the U.S. Surgeon General (www. mentalhealth. org) concluded that 22% of Americans suffer from some form of mental illness "at any given time," defining the term as "alterations in thinking, mood, or behavior. . . associated with distress or impaired functioning."  And don't think you can just dismiss the problem by firing the employee.  That's not an option in today's tight labor market (and because of rules that ban discrimination based on disability). 

We're not talking here about employees who turn violent or hear voices.  Schizophrenics comprise about 1% of the population, and they're seldom employed.  The people a business owner needs to worry about are the Jims —valued workers whose productivity suddenly and mysteriously plummets.  From depression to anxiety, from drug abuse to alcohol addiction, common psychiatric disorders take a remarkable, if little-discussed, toll.  In lost productivity and absenteeism alone, the cost to business approaches $312 billion annually (table).  Often, these costs are racked up in ways an employer might not notice. 

Take "Anthony" (who requested we change his name), an ambitious 25-year-old trying to make a career at a Washington talent agency.  He had sought a promotion vigorously —and then was seized by a stomach-churning dread at the news he had been made a manager.  Now, he would have to speak in public.  "If I had to address, say, 15 to 20 people, my hands would start shaking," he recalls.  "I felt I was outside my body, looking in. " Yet there was no avoiding biweekly staff meetings at the 35-employee agency.  So first, he "forgot" his notes to avoid a presentation.  The next time, he called in sick.  Worse still, the effects spread: He became "quiet and standoffish" with clients.  He feared it was just a matter of time before people noticed that his performance was slipping. 

In Anthony's case, the company got lucky.  He figured out on his own that he suffered from an anxiety disorder —an illness that afflicts an astounding 15% of adults —and sought treatment last spring at Washington's Ross Center for Anxiety & Related Disorders Inc.  A few months later, he notes proudly, he made an applause-winning presentation to the firm's principals. 

GETTING HELP.  But what should you do if your employees don't figure it out themselves? First, watch out for odd patterns of behavior.  "Workers who consistently avoid specific situations —say, travel opportunities —or who take a long time to get a job done may be struggling with an anxiety disorder," says Jerilyn Ross, founder of the Ross Center and president of the Anxiety Disorders Assn. of America in Rockville, Md.

Next, you need to confront these employees about their performance.  No, you don't have to become an amateur shrink.  In fact, experts advise that you stay away from anything personal and focus instead on concrete behavior, such as absenteeism or conflict with co-workers.  Then, you can nudge the employee —as Sam did —to get some professional help. 

Where? A growing number of small companies are turning to EAPs (box).  EAPs don't provide long- term treatment, but they do offer a safe environment where an employee can discuss problems with a counselor who then makes a confidential assessment, and if necessary, gives a referral to a mental-health professional. 

EAPs have long been a mainstay at large corporations, where they're run by the human resources department (75% of companies with more than 500 employees have them).  For a small company, though, they were not affordable until outsourcing created new alternatives.  Now, you have several options, including insurers, big mental-health chains, and local independent providers, whose monthly fees typically range from $2 to $6 per employee.  As a result, 27% of companies with fewer than 25 employees were offering plans in 1997 —nearly double the 1994 rate, says the federal Substance Abuse & Mental Health Services Administration. 

John P. Chapo, executive director of the Folsom Children's Zoo in Lincoln, Neb., has been sold on the idea for more than a decade, ever since he signed up with the Lincoln Employee Assistance Program, one of the country's first locally based EAPs serving the small-business market.  Chapo pays a flat annual fee —currently $1,200 —and insists the program has paid for itself many times over by helping good workers who face bad times stay on the job and make full recoveries.  He recalls one worker who fell apart after a personal crisis.  An EAP counselor found he was suffering from clinical depression, a mood disorder that Steven E.  Hyman, the director of the National Institute of Mental Health, calls an "equal opportunity illness" that hits roughly 7% of adults.  Thanks to new drugs and other scientific advances, treatment now is effective (as with anxiety) in about 80% of cases.  And it worked with this employee, Chapo says.  Six months after the EAP made a referral to a professional counselor, the employee was back to his old self, as productive and upbeat as ever.  Crisis resolved. 

HEADACHES AND HANGOVERS.  While most disorders hit employers equally, drugs and alcohol —often not viewed as mental problems at all —take a bigger toll on smaller companies.  In 1997, 9% of workers in companies with less than 25 employees used drugs, compared with 5. 8% in companies employing 500 or more, according to the most recent National Household Survey on Drug Abuse.  About 6. 3 million illicit drug abusers are employed full-time.  An additional 6. 2 million workers abuse alcohol. 

Although a distinct disorder in itself, substance abuse is often nothing more than self-medication for depression, anxiety, or other disorders, experts say.  "Only a small minority of addicts are hobos.  Most bring their headaches and hangovers to work," says Jim G. Lipari, project officer of the Center for Substance Abuse Prevention's Drug-Free Workplace Helpline.  He says small employers, unlike large ones, have been slow to take action.  Lipari recommends comprehensive antidrug programs, which include a written policy, a referral mechanism, and drug education for employees.  Supervisors should be trained to spot and deal with abusers.  Drug-testing, which costs $50 a head, is optional. 

Are such efforts worthwhile? Harold C. Green, president of Chamberlain Contractors Inc., in Laurel, Md., thinks so.  Back in the mid-1980s, his 65-employee construction and paving outfit became one of the first small businesses to invest in an antidrug program.  Green's motive was to stop a rash of accidents that were driving his insurance costs through the roof.  Suspecting drug-induced recklessness, he began shelling out about $15,000 a year for employee training to reduce stress and annual physical exams along with random drug testing.  As his accident rate fell by 70%, his combined premiums for workman's comp, auto, and general liability declined from $252,000 in 1987, to $120,000 in 1991, to $108,000 this year. 

"Even casual drug use is dangerous.  Unfortunately, with their focus on production and sales, most entrepreneurs aren't willing to commit to a program," Green says.  If employees are caught, Green gives them a chance to get treatment.  Over the years, about 95% have complied. 

UNFAIR STIGMA.  Ironically, just as small companies are signing up for EAPs, the willingness of insurers to spend money on mental health has been declining —even though disorders can be treated more cheaply than ever with new drugs.  The result: Employees are getting about half as much insurance coverage as a decade ago.  The percentage of total health-care dollars going to mental health fell from 6. 1% in 1988, to 3. 2% in 1998, says the Hay Group, a benefits consulting firm in Arlington, Va. 

In his report, the Surgeon General deplored the trend, blaming cost-cutting by managed-care companies as well as "decades of stigma and discrimination" for the disparity between mental and general health-care coverage.  "Unfortunately, it takes a long time to dislodge prejudice and false beliefs," says Paul J.  Fink, a past president of the American Psychiatric Assn.  If those attitudes are stopping employers from getting their money's worth out of the Anthonys and Jims on their payroll, you've got to wonder just who's acting irrational. 

— Decreased productivity

— Poor concentration

— Morale problems

— Lethargy

— Frequent accidents or risk-taking

— Frequent tardiness

— Increased absenteeism

— Restlessness; irritability

You can sign up either with a national company that provides mental-health services (about a half dozen now offer EAPS) or with a local provider specializing in small business.  The big ones are likely to be cheaper, their staffs are more highly trained, and they offer sophisticated support services such as round-the-clock hot lines.  Local folks, on the other hand, give service that's more personal, and they may know more about regional resources. 

How to shop?  First, take a look at the mental-health component of your health plan.  You may be able to add on EAP services at a reduced rate.  If not, you can find EAP providers in your state, using the Web site of the Employee Assistance Professionals Assn. in Arlington, Va. Look in the small-business directory (www.eap-association.com; 703 522-6272).

A key question to ask any provider: What proportion of employees who have access to the program actually use it? The industry standard is about 5% each year.  Anything less suggests that the program is ineffective.  You should also ask how long it usually takes to get a nonemergency appointment:  More than three days is unacceptable.  A good EAP should also provide follow-up care for an employee who is referred for mental-health services.  Treatment for substance abuse, for example, may take a while, and the EAP should monitor the employee's progress every few months. 

There's a side benefit to an EAP, too: The programs turn employees into better-educated consumers of mental-health care.  A worker who receives coaching on what to look for in treatment —and on what treatment is needed —is likely to file fewer claims.