Permanent Health Insurance and Holiday Pay

Published: 26th January 2012
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Permanent health insurance (PHI) is designed to provide incomes for an employee if he is are unable to work because of ill health.  Typically a PHI policy will pay 75% of an individual's salary until retirement.

The decision of the House of Lords in Stringer v HMRC means that someone who is off work sick will continue to accrue holiday during his absence. The question of whether somebody who is absent from work for many years will continue to accrue holiday at the full rate has recently been considered on the European Court of Justice (KHS AG v Schult 2011). It seems that holiday in these circumstances may be limited to about 18 months.

The ECJ issued guidance regarding "carry over periods" that:

  1. A carry over period must be significantly longer than the reference period for the relevant holiday year. In the ECJ case of Schultz-Hoff it was ruled that a carry-over period of 6 months was not incompatible with the WTD. 
  2. A worker must where necessary be allowed pre-determined, possibly long-term and staggered rest periods. 
  3. Employers should not face having a worker accumulating lengthy periods of absence.

The ECJ also emphasised that an entitlement to paid holiday is a very important principle of EU law. A worker's entitlement to paid holiday may not be subverted by the employer imposing such conditions that a worker finds difficult to comply with.

Where you have an employee who has been off sick for many years, the question may arise as to the level at which holiday should be paid? Is it at the rate the employee received before he went sick?  Should some form of pay increase be factored in? Or is it at the rate at which PHI is paid? There is some authority (Souter v Royal College of Nursing Scotland 2010) to suggest that where an employee is receiving PHI, the contract of employment was effectively varied so that he would receive the lower PHI salary level. Any statutory holiday taken while in receipt of the PHI benefits, would have been calculated with reference to the lower salary level.  Thus any holiday paid will be calculated at the rate at which PHI has been paid. NB This was only a tribunal decision and could be appealed, but it can be seen as a rough guide.

Ms Souter had been off work for eight years, receiving payments under a PHI policy. At the end of that time she was dismissed, and argued that she was entitled to holiday pay accrued throughout the period. Using the unlawful deductions from wages provisions of the Employment Rights Act 1996, she submitted that the failure to make payments of holiday pay to her over the years she was off work amounted to a continuing series of deductions from her wages.

The tribunal disagreed for three reasons:

Firstly, the employer had paid accrued holiday pay on her dismissal, but only in respect of her final year of work, and not in respect of the previous years for which she was claiming. The tribunal found this payment in respect of the final year brought to an end the possibility of a series of deductions. The limitation period for her claim ran from the end of the previous holiday year, and as she had not brought her claim within that period she was out of time.

Secondly, the UK implementation of the Working Time Directive (the Working Time Regulations 1998) only permits holiday to be taken in the year it accrues. As a private employer, the RCN was not bound by the wider EU concepts relating to holiday and could rely on the more restrictive UK approach which does not permit holiday to be carried forward from one holiday year to the next.

Lastly, the tribunal considered how much holiday pay would have been due and concluded that the contract had been effectively varied and holiday pay would be calculated and paid on the basis of that variation.

Readers should note that some aspects of the decision are moot and that it is only an employment tribunal decision. Nevertheless, it's an interesting case and one worth bearing in mind.

Russell HR Consulting provides expert knowledge in the practical application of employment law as well as providing employment law training and HR services. For more information, visit our website at or call a member of the team on 0845 644 8955.

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