Absent with leave

Common feature of PHI schemes that clash with annual leave provisions in the
Working Time Regulations may lead to unexpected costs for the employer.  By Alex Lock

All permanent health insurance (PHI) schemes pay the employee a fixed
percentage of their salary in the event of illness or injury. This figure is
usually 60 per cent, and is calculated on the basis of gross earnings over the
previous 12 months, often including commission payments or other contractual

Another important common feature is that the employee must remain in
employment with the employer. If the contract of employment is terminated,
eligibility for the scheme ends at the same time. In such instances, the courts
have held that there is an implied term in the employment contract that the
employer will only terminate employment for misconduct.

It is these two aspects of PHI schemes that may lead to an unforeseen cost
to the employer by creating a conflict with the annual leave provisions of the
Working Time Regulations (WTR) 1998.

Right to annual leave

The WTR introduced a statutory right to at least four weeks’ paid annual
leave. This right cannot be excluded, limited or modified by agreement.

In the case of Kigass Aero Components v Brown, the Employment Appeal
Tribunal considered whether staff on sick leave had a right to holiday. It
decided the WTR entitled a worker to annual leave during the whole or part of
the leave year, with nothing more required. There was no requirement for the
worker to undertake any work, and no express provision in the regulations for
annual leave to be taken from what would otherwise be ‘working time’.

However, there are some important conditions: the employee must give their
employer notice in good time before they wish to exercise their holiday
entitlement, and must also specify the days they want to take off. Although the
employer can give counter-notice to postpone the leave, it is not possible to
do so if that would curtail the employee’s leave entitlement during the holiday

Untaken leave cannot be carried over to the next holiday year, and the
employer cannot make a payment in lieu of holiday accrued but not taken – save
for where the employment ends.

The WTR provides how pay is calculated for the purposes of annual holiday
pay. If the employment contract provides for normal working hours that do not
vary, then the amount is determined by the contract. If the hours or
remuneration are variable, an average of the previous 12 weeks is taken.
However, where an employee is absent on medical grounds, the employer must take
the 12 weeks up to when the absence began. This may have implications for
employers where bonuses or commission make up a large part of a worker’s

Ongoing financial liability

The employer may be surprised to receive a holiday request from an ill or
injured employee who is unable to work. They may also be surprised to learn
that despite having funded the PHI policy premiums, the employer does have an
ongoing financial liability to the worker.

But this could well be the case, following the EAT’s decision in Kigass. The
worker is still employed by the employer, a condition of the PHI scheme. The
scheme will meet the employer’s obligations in respect of pension
contributions, but the worker still has the right, year-on-year, to annual
leave of 20 days.

So what happens to an employee with a holiday year running from 1 January to
31 December, who is absent for the entire period under a PHI scheme? They will
receive 60 per cent of annual salary throughout this period. But in four of
those 52 weeks, the employee is entitled to 100 per cent of their salary, at
the very least. The liability is the employer’s and not the insurer’s, as the
employee does not have an employment relationship with the insurer. Therefore,
the employer will need to fund the 40 per cent difference from its own pocket.

A further problem arises (depending on the exact terms of the scheme) as to
how the worker’s pay is calculated. Some schemes provide for 60 per cent of basic
earnings, excluding bonuses and commissions, whereas "a week’s pay"
under the WTR takes such items into account. Therefore, the differential
between a week’s pay under WTR and the 60 per cent provided by PHI, may be
greater than 40 per cent.

To qualify, however, the employee has to make a request for annual leave,
and the entitlement can only be exercised within the leave year. Employers
needn’t worry about receiving a late request for the previous two or three
years’ entitlement.

Practical advice

– Check the terms of your PHI insurance policy – specifically whether it is
a condition of cover that the contract of employment continues

– Check the terms in relation to what percentage of earnings is offered, and
how ‘earnings’ are calculated

– Seek advice from your broker and/or insurer as to how they will treat any
request from an incapacitated employee for annual leave payments

– Keep records of all holiday requests made and granted within leave years.

Alex Lock is a solicitor at Beachcroft Wansbroughs

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