The tricky question of GIP and staff holiday pay entitlement

IWAS asked a tricky question last week in a training session about the interaction between group income protection – also known as permanent health insurance or PMI – and holiday pay.

Group income protection is an insurance policy that employers can take out and pay for, that provides an income to employees who are off sick.

It is a less common employee benefit than private health or death in service (life assurance) and in my experience it tends to be larger employers and/or those with a history of generous sick pay policies that elect to put group income protection policies in place.

Although the level of protection varies depending on what cover the employer chooses to offer, typically group income protection (GIP) kicks in after a set period of sickness absence (ranging from 12 weeks to 28 weeks of absence) and pays out for a fixed period of up to five years or even (less often these days) up to the former retirement age of 65.

The level of cover is usually between 50% and 75% of normal income and there will be a definition of what “incapacitated” means in order to qualify for the benefit and what process the employee has to go through to demonstrate incapacity to qualify for the benefit.

But what is the holiday pay entitlement of employees on long-term sickness absence receiving payment from the employer under a GIP policy?

Case law (HMRC v Stringer) has established that employees on longterm sickness absence continue to remain entitled to take paid holiday, even when not fit for work.

Holiday leave that is not taken rolls over, so that holiday pay can build up while employees are off sick. However, unlimited carry over is not required. The case of Plumb v Duncan Print Group Limited found that it was consistent with the Working Time Directive for the employer to specify in its contract a limit to carrying over holiday leave to 18 months from the end of the relevant leave year.

This 18-month period is therefore a sensible period for employers to adopt for carry over of holiday. However, it is important to note that if employees are refused holiday by the employer when off sick then the case of King v Sash Window Workshop Limited means that there is then no limit to carrying over holiday entitlement.

Employees who are off sick and are receiving payment under a GIP policy are therefore perfectly entitled to request to take holiday. As holiday pay is a week’s usual pay this would mean the employer topping up the holiday pay from the level of benefit being paid under the GIP policy to the usual week’s salary.

There has been one Scottish first instance tribunal case on this issue – Souter v Royal College of Nursing Scotland – where the tribunal found that the employment contract had been varied when the employee began to receive GIP benefits to reflect the lower salary level.

Her entitlement to holiday pay was found to be only at the level of the GIP benefit.

However, there has not been any other case law on this and whether other tribunals would follow it remains to be seen.

Although employers cannot insist that employees who are off sick take their holiday, one option for employers is to encourage employees to take their holiday entitlement while on long-term sick and for the employer to top up the employee’s

GIP payment. In this way there is a benefit to the employee of taking the holiday (more money than they would otherwise get) which also prevents the employee building up substantial holiday entitlement to be used later on their return to work or that the employer will need to pay for in lieu on termination of employment.

Another option is “paid direct” GIP after a period, which provides for continued payment of benefits by the insurer to the employee after employment has been terminated.

In such circumstances, the employee does not accrue holiday as they are no longer employed. With the security of future GIP payments for a period, employees are less inclined to raise issue with the termination of their employment and the employer does not have to deal with a dismissal process when the GIP payment period runs out.

Probably the most common option selected by employers is to wait and see whether employees paid GIP benefits over a number of years ever raise the issue of accrued holiday, either during sickness absence or on eventual termination of employment.

Employers that provide GIP should draft their contracts and policies carefully so that they:

■ Provide that the GIP benefit is subject to the rules of the relevant insurance provider as amended from time;

■ reserve the right for the employer to amend the terms of the GIP benefit including the insurance provider or withdraw it altogether;

■ reserve the right to terminate the employment contract, notwithstanding the GIP benefit;

■ specify that holiday not taken due to ill health may not be carried over longer than 18 months following the end of the relevant leave year; and

■ specify that payments made under the GIP policy are set off against the liabilities of the employer, including in respect of holiday and notice pay.

One final point that often crops up is what notice pay is due to employees who have been on long-term sick on termination of employment?

If their contractual notice period is not at least one week longer than the statutory notice period required, notice pay on termination of employment (by reason of incapacity or as part of an agreed exit under the terms of a settlement agreement) is at the employee’s usual rate of pay.

This is the case even if the employees have long since exhausted statutory sick pay or any GIP benefits and would receive no pay at all (other than holiday pay) if they remain in employment.

■ Bethan Darwin is a partner with law firm Thompson Darwin.