Latest case law may mean change for PHI policies

The recent European Court of Justice (ECJ) decision in Stringer v HMRC [2009] has established that workers continue to accrue their 28 days’ statutory holiday entitlement while on long-term sick leave. This raises interesting issues in respect of employees in receipt of permanent health insurance (PHI) benefits, and will no doubt affect what features employers look for in PHI products.

One current hot topic is whether employers will be able to offset PHI payments made to employees against the employees’ full rate of pay or whether the employer must pay full salary for any annual leave taken during long-term sickness absence.

As the position on this has not been clarified by the ECJ or the House of Lords, this is an issue ripe for litigation. Current thinking is that employers will be liable for a top-up payment only, but this is by no means certain. Some employers may look to amend their contracts or even the PHI scheme rules to clarify that, while PHI payments will be topped up during any period of annual leave taken, no further payments will be due.

It remains to be seen whether this approach will be deemed lawful.

Another question vexing employers is whether there are circumstances in which an employee in receipt of PHI payments is likely to breach the rules of their PHI scheme by taking annual leave. The advice currently being given to employers is to contact their insurers for written clarification.

Historically, it was easy to allow employees to remain on sick leave and in receipt of their PHI benefits, as this had no adverse cost implications for the employer. Employees on long-term sick leave will now cost their employers more, however, as the 28 days’ statutory annual leave will have to be paid for.

Employers will therefore be keen to assess whether they can lawfully terminate the employment relationship at an earlier stage. Insurers should expect to receive an increasing number of queries from employers regarding whether employment can be terminated without jeopardising the employee's right to continue receiving their PHI payments. Lawyers are currently advising their clients to look for PHI policies that give the option of claims being paid to employees directly, so that employment can be terminated with less risk. Such policies look likely to become increasingly popular with employers. IT

Julian Hemming heads the employment, pensions and incentives team at Osborne Clarke