Lord Freud, the government’s welfare reform minister is considering proposals for the reform of the current system of statutory sick pay (SSP) to cover sick employees.

His aim is to avoid people claiming long term sickness and disability benefits by providing earlier support for employees. He has commissioned an independent review of sickness absence which is being co-chaired by Dame Carol Black, the government’s national director for health and work and by David Frost, the director-general of the British Chambers of Commerce.

Lord Freud stated recently that the current system is unsustainable and change is therefore almost inevitable.  Lord Freud’s approach to the issue is likely to be tough as he has been quoted as saying that most of those off sick for any length of time “do not have a true medical problem” but rather they are suffering medical symptoms caused by a problem at work. 

In 2008 Carol Black called for the introduction of the ‘fit note’ system to replace sick notes. The aim was to cut the cost of sick leave for employers. The Department for Work and Pensions estimated that the use of fit notes would save the British economy an estimated £240 million over a period of 10 years from April 2010.

The current proposals being considered by Carol Black and David Frost are likely to go considerably further than this. One of the proposals is that employers will be required to take out income protection insurance for their employees rather than paying out statutory sick pay and indeed occupational sick pay (if this is also offered by the employer).

It is estimated that sickness absence costs employers approximately £8billion per year and it costs the taxpayer approximately £2billion in benefit payments. The theory is that take-up of group income protection policies will reduce employers’ sickness absence costs as well as the cost to the taxpayer. It is believed that with insurers footing the bill for payments to sick staff they will have an incentive to provide health and wellbeing support to encourage employees to return to work as quickly as possible.

Currently, employers are required to provide statutory sick pay for a period of up to 28 weeks (and in many cases this is topped up for a period of time by the employer’s own occupational sickness scheme). Lord Freud believes that the longer employees are off work the more likely they are to fall into long-term inactivity and find it difficult to return to work.  The aim is to encourage an earlier return to work.

Another option is that employees will be required to take out an income protection policy themselves. The centre-left think tank Demos published a report on 9 March 2011 setting out its proposals on welfare reform.  These will also be considered by the independent review.

Demos believe that reform to SSP could cut the number of people moving onto Employment Support Allowance by 43 per cent and save the taxpayer £139 million a year. It has also found that only 65 per cent of people on long term sick leave ever return to work. Demos has suggested that staff should be provided with a £100 national insurance rebate if they take out an income protection policy, either as individuals or under an employer-sponsored scheme. 

Max Wind-Cowie, the author of the Demos report believes that a rebate of £100 equates to about the third of the cost of a group policy that would provide 75% income replacement but a much smaller proportion of an individual policy.

All employers will be attracted by the idea of a more effective way of managing sickness absence and the attendant cost savings. However, very careful consideration will need to be given to the detail of the recommendations made by Lord Freud and whether any new system that is introduced will be compulsory or voluntary. 

Will the government prescribe minimum requirements for a new system to be adopted by employers and/or employees personally and to what extent will any new system operate in tandem with the current system of SSP?  Will SSP will be phased out over a period of time? It would appear that this is likely.

Factors to be considered when implementing a new system of insurance based cover are:

• The waiting period before payment commences under a policy.  The longer the waiting period, the lower will be the premium. Current income protection or permanent health insurance policies usually kick in after a waiting period of about 28 weeks i.e. once SSP runs out (but sometimes sooner). The intention behind the proposed reforms suggests that payments are likely to commence at a much earlier stage.  What will happen during the waiting period? If SSP is no longer available, employees will receive nothing unless the employer operates an occupational sick pay scheme.
• The percentage of an employee’s income that will be paid.  Perhaps employees will be given a choice with different levels of cover?
• An employee’s health, interests and lifestyle. These factors may affect the level of premium and employees with certain medical conditions or who pursue certain activities/interests may be refused cover.  What will happen in that eventuality?
• The age of the employee may also affect the level of premium but the sex of the employee should no longer do so.

It is the detail of the government’s proposals that will be crucial in evaluating the benefit of any new system. 

Joanna Lada-Walicki is Partner, Employment Department Barlow Robbins LLP