Will the new Fit for Work service mean higher absence costs for small firms?

The Government’s Fit for Work service, which is being rolled out in 2015, is meant to cut sickness absence costs for employers. However, some believe that the changes will leave small firms out of pocket.  

From 1995, the percentage threshold scheme (PTS) allowed employers to reclaim statutory sick pay (SSP) from HMRC, where the total SSP paid in a month exceeded 13% of the employer’s Class 1 national insurance contributions for that month. This allowed employers with higher than average sickness absence to recover SSP costs and was primarily of benefit to small employers.

The Government abolished the PTS on 6 April 2014, after an independent report in November 2011 found that it cost the Treasury £50 million per year and gave employers no incentive to reduce sickness absence. Employers will have until 6 April 2016 to submit claims to recover SSP paid for sickness absences that occurred before the abolition of the PTS.

At the same time, the record-keeping obligation on employers that existed in relation to SSP was abolished. This had required employers to keep records of sickness absence and SSP payments for three years after the end of each tax year, which was largely related to the administration of the PTS. The abolition of the SSP record-keeping requirement is expected to reduce costs for employers.

The Government’s decision to abolish the PTS in the current economic climate has attracted criticism. In part, this is because the proposals received little publicity. It is also perceived that it will have a disproportionate impact on small businesses. In 2011, the Government impact assessment of its proposals stated that micro-employers received 70% of the benefit of the PTS.

Introduction of the Fit for Work service

The Government has countered these arguments by saying small businesses are expected to benefit most from the introduction of the new Fit for Work service, which will be funded by the expected £50 million annual saving following abolition of the PTS.

Fit for Work will provide occupational health (OH) assessments and assist employees to return to work when they have been absent for four weeks or more. Small businesses are the least likely to have access to OH services at present. The Government therefore hopes that any financial loss to businesses from the ending of the PTS will be offset by a reduction in lost working days.

Fit for Work is not expected to be fully operational until late 2015, however, and attendance by employees who have been absent for at least four weeks will not be mandatory. It therefore remains to be seen how effective it will eventually prove to be.

Tax relief on recommended medical treatment

The Government is also introducing an exemption from income tax of up to £500 a year for each employee on medical treatments recommended by Fit for Work, or an OH service arranged through their employer.

Any expenditure by the employer falling under this exemption will also be disregarded for national insurance contributions purposes. Normally, expenditure by employers on medical treatment for employees is chargeable to income tax, either as a payment of earnings or as a taxable benefit, and a corresponding liability for national insurance contributions will arise.

The tax exemption for expenditure on recommended medical treatment will therefore financially benefit both employers and employees. It is hoped it will also help employees return to work more quickly following periods of sickness absence through encouraging provision of appropriate treatment.

The exemption will only apply where an employee has been absent from work due to injury or ill health for at least 28 days, or they have been assessed as being unfit for work for at least this period. Some think that this minimum length of absence requirement is unduly restrictive.

Practical steps for employers in managing sickness absence

An employer should:

• proactively improve employee engagement and address issues such as health and safety and stress at work in order to reduce employee sickness absence;
• manage instances of persistent short-term absence through holding return-to-work meetings with all employees and seek to establish the underlying causes of any recurring absences;
• maintain reasonable contact with sick employees and actively consider steps that may facilitate an earlier return to work, including the duty to make reasonable adjustments where an employee is, or may be, disabled; and
• include appropriate wording in sickness absence policies and employment contracts requiring employees to attend assessments by OH or the Fit for Work service.