Payment holiday

A series of cases relating to holiday pay have left group risk professionals struggling to advise their clients on the matter, says Edmund Tirbutt

The June 2009 House of Lords final judgment on Stringer v HMRC has left the group income protection community little wiser about holiday pay and sick leave issues than they were five months earlier when the European Court of Justice (ECJ) originally ruled on the case. It has been confirmed that workers on sick leave are entitled to be paid statutory holiday and to receive payment in lieu of untaken holiday on termination, regardless of sick leave absence. Additionally, claims for holiday pay, and pay in lieu of holiday, can be pursued as claims for unauthorised deductions from wages under the Employment Rights Act 1996.

But it still remains unclear whether employees have to give notice of holiday whilst absent through sickness. There is also doubt as to whether holiday entitlement can be carried over to future years, although a subsequent ECJ ruling in September 2009 on the case of Pereda v Madrid Movilidad SA suggests that it can be (see Box). This casts doubt on previous decisions to the contrary based on the UK Working Time Regulations.

In a worst case scenario, therefore, an employer could find itself having to compensate an employee for 28 days lost holiday entitlement a year for every year back to 1998 when the Working Time Regulations came into effect.

At the time of writing even the Department for Business, Innovation and Skills has yet to offer its interpretation on these grey areas and, although some commentators talk in terms of having to wait only a few months for relevant case law precedents to be set, others stress that it could take years. After all, two cases during 2009 failed to provide the clarity everyone was looking for, so why should the next two prove any different?

Feedback about the impact this uncertainty is having on employers who are concerned about the adequacy of their income protection cover varies significantly from one insurer to another. Zurich Corporate Risk reports that “no-one is asking us to do anything until the situation is clearer” whereas Aviva describes the subject as “possibly the most asked about on the regulatory front.”

The one change made by all major income protection insurers to date in response to the issue has been to say that they will not exercise their rights to make deductions if an employer tops up their benefit above the scheme maximum to reflect accrued holiday entitlement.

Only Legal & General purports to have gone any further than this by emphasising that employers can insure against the additional risk by tailoring a capital option (a lump sum paid at the end of a short term benefit period of two to five years) specifically for the purpose. Employers can ask for any sized lump sum but Legal & General, which acknowledges that take-up of the facility has so far been minimal, expects that most requests will be to cover 28 days holiday entitlement for every year of employment back to 1998.

Unum is hoping to introduce a new format specifically to cater for the additional holiday pay risk in 2010 but its plans seem to be based on an estimate of the amount of case law that will materialise in the near future.

Helene Gullen, commercial marketing manager at Unum, says: “We are looking to offer employers the ability to cover this new liability under group income protection at a slightly higher cost but the problem is that we are still not sure what the actual liability is. It’s not clear whether references in the judgments to statutory sick pay apply to contractual arrangements and we will have to wait for cases to come to court to clarify what the liabilities are in law.”

In truth, it’s hard to think of a worthwhile solution that is not merely a slight adaption of existing cover. For example, legalities permitting, a group income protection facility could be tweaked to pay for annual leave as you go along or employers could simply top up their existing scheme to pay for the extra liability. Zurich Corporate Risk has calculated that the cost of an employer having to pay for 28 days holiday a year is approximately equivalent to an extra 2 per cent of benefit.

In addition to capital options offering a solution for dealing with sizeable backdated liabilities, short-term benefit periods without capital options can help reduce liabilities as long as contracts of employment are terminated at the end of the benefit period – because holiday pay will not be accrued once employment has ceased. It should, however, be stressed that employers need to take into account all aspects of employment law before terminating employment.

Pay direct policies, which enable benefits to be paid to claimants right up to retirement date after they have been removed from the payroll, could also appeal for the same reason. Unum in fact already reports a 20 per cent increase in pay direct quotes for new business but acknowledges that there is little interest in switching existing schemes to this format as, depending on the contract of employment, doing so may well involve having to consult with the workforce.

A further option is simply to selfinsure against a potential holiday pay liability, and this is certainly something that intermediaries should be mentioning to clients who feel that the law is not yet clear enough for them to be considering altering their income protection arrangements.

John Gillman, an independent healthcare consultant who advises the Income Protection Task Force on group risk issues, says: “Employers should be looking at what their risk exposure is and therefore examining current long-term absence cases in terms of their potential risk and starting to put a cost on the worst case scenario.

They can then decide whether they can afford to self-insure and, if not, take out increased group income protection cover.”

Intermediaries should also be looking to use the current uncertainty as a positive advert for group income protection on the grounds that the rehabilitation and early intervention facilities provided by insurers can go a long way towards avoiding liabilities by reducing the chances of long-term absence occurring in the first place.

Additionally, they should ensure that clients are actually aware of the legal developments in the holiday pay area. Worryingly, recent research by industry body Group Risk Development (GRiD) has indicated that a quarter of employers are still not aware that employees on sick leave can take any unused statutory holiday on return to work or receive payment in lieu if they leave the company.

GRiD spokesperson Katharine Moxham says “This clearly indicates that there is considerable scope for advisors to play a pivotal role in encouraging employers to revisit sickness, absence and holiday policy and to consider the merits of group income protection provision, especially given the current competitiveness of the market.

Where an income protection scheme is already in place it is important for advisers to work with their client and provider to arrive at a solution that best meets their clients’ particular needs. Recording and managing sickness absence is now more important than ever as failure to do so could result in unknown liabilities.”

Whilst these points should certainly be taken on board, it is also important for advisers to keep the holiday pay issue in proportion. Whilst it may warrant issuing an e-bulletin or being mentioned at client meetings that are taking place for other reasons, many experts would question whether it constitutes sufficient grounds in itself for arranging a client meeting.