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How to introduce and manage an occupational sick pay scheme

Author: Sue West


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An occupational sick pay scheme is a means of paying employees more than their statutory sick pay entitlement during sickness absence. It is not a legal requirement for employers to pay occupational sick pay, but many will choose to go beyond the minimum statutory provisions and pay employees up to their normal rate of pay for some absence.

Occupational sick pay is sometimes referred to as company sick pay, enhanced sick pay or contractual sick pay.

Statutory sick pay

Employees who are unable to work because of sickness for four or more consecutive days are entitled to statutory sick pay provided that they satisfy rules relating to minimum earnings, notification of illness and provision of evidence. The first three working days of an employee's illness are "waiting days", after which statutory sick pay becomes payable.

Employers are not obliged to operate the statutory sick pay scheme if they offer contractual sick pay that is at least as generous as the statutory scheme for each relevant day of illness.

Why introduce sick pay above the statutory minimum?

Some employers will choose to go beyond the statutory sick pay requirements for business reasons, such as attracting and retaining the best employees by matching or bettering the offers of their competitors. Employers may also be driven by their responsibilities to provide for their employees' wellbeing, with the potential effect of enhancing employee engagement. Further, paying sick pay could make it less likely that employees will attend work when unwell and spread contagious conditions among the workforce.

There is, of course, a cost element associated with providing enhanced sick pay, and some employees may be more inclined to take a sick day when they are actually fit to attend work if they are not being financially penalised for their absence. It is therefore important that absence is managed by trained and competent managers.

Contractual status

Employers are required to include any terms and conditions relating to sick pay in the written particulars of employment or contract of employment; or to make reference in the written particulars or contract to another document, such as a policy or handbook, that includes details of the scheme. Therefore an employer should consider carefully the occupational sick pay that it offers, as any change would require a change in contractual terms.

As occupational sick pay is contractual, employers have the freedom to set their own reasonable rules and to determine the rates at which occupational sick pay is payable. The scheme rules should advise that the scheme will be regularly reviewed and that the employer reserves the right to amend it from time to time.

If an employer does not specify a right to contractual sick pay, but makes payments in addition to statutory sick pay, custom and practice may determine that there is in fact an occupational sick pay scheme. It is therefore prudent for employers to define the rules of the scheme, ensuring that employees are clear about their entitlements and individuals are not treated inconsistently.

The employer should bear in mind that other employment policies that have an impact on sick pay need to be consistent with the occupational sick pay provisions. For example, employees' entitlement to occupational sick pay may be subject to their adhering to absence reporting procedures set out in an absence management policy. Policies that employers should check for consistency with occupational sick pay provisions include those on absence/attendance management; occupational health; employee wellbeing; alcohol and drug misuse; and absence for reasons other than sickness.

Entitlement to occupational sick pay

An employer may decide to have a single sick pay scheme covering all employees or separate schemes for different staff groups, for example a scheme covering only directors or managers. Where the employer intends to operate different schemes, it should objectively assess the scheme rules to ensure that they do not unlawfully discriminate against groups of employees with protected characteristics, as defined by the Equality Act 2010.

Employers should not set out different arrangements for occupational sick pay on the basis that an employee works part-time hours (although benefits can be pro rated) or on a fixed-term contract, as these groups of employees have specific legal protection from being disadvantaged by virtue of their contract type.

Agency workers are also entitled to any occupational sick pay benefit that they would receive if they were directly employed, once they have completed 12 weeks' service in the same role. If occupational sick pay is not payable until an employee has successfully completed a probationary period, an agency worker would not qualify for occupational sick pay until he or she had completed an equivalent qualifying period.

The employer may decide that occupational sick pay will not be payable, or may be withheld, in certain circumstances (see below). The criteria that determine whether or not an employee qualifies for occupational sick pay should be set out clearly in the policy. Refer to our policies and documents section for a model sick pay contract clause.

Probationary period

As occupational sick pay is a significant employee benefit that has the potential to result in considerable cost, the employer may consider excluding employees who are working in their probationary period from the scheme, or offer them only limited provision.

Reason for sickness absence

The employer could specify in its scheme rules that absences to which the employee has contributed through his or her behaviour will not qualify for occupational sick pay. Examples of this could include participating in extreme sports or failing to follow medical advice. The employer would be required to pay statutory sick pay, where the employee qualifies for this, regardless of its occupational sick pay rules.

In cases where the sickness absence results from an accident for which the employee could receive damages in compensation for loss of earnings, the occupational sick pay scheme rules could state that any occupational sick pay is to be treated as a loan and is repayable on the employee's receipt of such monetary compensation.

Disciplinary action

The employer could decide on a policy of not paying occupational sick pay to employees while disciplinary proceedings are pending against them. This could act as a deterrent to employees attempting to delay proceedings by going off sick in response to disciplinary allegations.

Alternatively, or in addition, employers could make it their policy to withhold occupational sick pay while an employee is subject to a live disciplinary sanction, such as a written warning.

Notice of leaving

As the reasons for paying occupational sick pay will often relate to employee engagement and retention, an employer may decide to specify that it is not payable for any sickness absence during an employee's notice period.

Employer discretion

An employer's occupational sick pay policy could include an element of management discretion to allow it to pay an employee who would not otherwise be entitled, if there is good reason for doing so. For example, the employer may wish to exercise discretion to pay a disabled employee in full, rather than at a reduced or nil rate, while reasonable adjustments are being made to enable him or her to return to work. The policy could also allow discretion to decline to pay occupational sick pay to a particular employee in circumstances not already excluded by the policy, again if there is good reason for doing so.

The employer should set out written guidelines to managers on where discretion can be applied to ensure that they act consistently. This will help to minimise the risk of discrimination arising as a result of discretion being exercised. The guidelines could require managers to set out the business case for an exception and obtain senior management sign-off.

Sick pay rate

When devising an occupational sick pay scheme, the employer will need to decide the rate or rates at which employees on sick leave will be paid and for how long the rate will be paid. For example, it could decide to continue to pay an employee's full rate of pay for a certain number of weeks' absence, followed by a further period at half pay.

Many organisations offer more generous sick pay benefits to employees as their length of service increases. For example, an employer may decide to offer two weeks at full pay and two weeks at half pay for employees between confirmation in post and one year of service, and increase this to four weeks at full pay and four weeks at half pay once they have completed a year's service.

Employer practice in this area is set out in the 2019 XpertHR survey of occupational sick pay schemes.

Employers should be aware of the risk of age discrimination when linking entitlement to benefits to length of service, because younger workers are less likely to be able to meet such a criterion. Under the Equality Act 2010, an absolute exception is made for service-related benefits awarded by reference to length of service of up to five years, so increasing benefits during the first five years of employment will not amount to indirect age discrimination. An employer may be able to justify increased entitlements linked to more than five years' service with reference to a business need, for example rewarding loyalty.

Where an employee's pay is variable, for example as a result of commission, bonuses or overtime, a day's pay is not easily defined. As an occupational sick pay scheme is contractual, the employer has the freedom to stipulate what it will and will not include. To manage expectations and avoid disputes, the scheme rules should clearly state the elements of pay (for example a shift allowance) that are and are not included. The rules should also clarify whether any statutory sick pay to which the employee is entitled is included in the rate of occupational sick pay or is paid in addition to this (which would be the case only when the rate of occupational sick pay is less than full pay).

Where some employees work irregular hours, the scheme should address how their occupational sick pay will be calculated, if it is not known what hours they would have worked during the period of absence. One option is for the employer to base sick pay on the employee's average pay, calculated from a set number of preceding weeks, for example a 12-week period.

Previous sickness absence levels

Occupational sick pay schemes typically offer a defined number of paid sick days in any one year. When deciding how many days to offer, the employer will need to strike a balance between providing security for absent employees with affordability for the organisation and incentive for employees to attend or return to work. Limiting the amount of sickness benefit paid can assist with the employer's management of excessive long-term or intermittent sickness absence.

In the same way as annual leave falls into a specified "holiday year", an employer may decide to specify that occupational sick pay entitlement falls into a calendar year. If an employee exhausts his or her entitlement and is still on sick leave at the start of the new sick pay year, the scheme rules should specify that the employee will not receive additional entitlement until he or she has returned to work for a defined duration.

Alternatively, to avoid employees returning to work to trigger a new entitlement and then starting a new period of absence, the period could be set as a rolling 12 months. The employee's entitlement to sick pay for any period of absence would be determined by deducting from the full entitlement any relevant period of sickness absence in the preceding 12 months. Refer to our policies and documents section for a model sick pay contract clause.

Start date for payment

An employer may choose to pay occupational sick pay from the first day of absence. Alternatively, it could attempt to deter short-term intermittent absence by paying occupational sick pay only from the second day of absence, or mirror statutory sick pay arrangements and pay only from the fourth day of absence, with no payment due for the first three days, which are classed as "waiting days".

Part days of illness

Employers should consider how to deal with an employee who works part of a day before going home ill. They should set out rules as to how to count a partial day of sickness absence for both sick pay and absence management purposes. The statutory sick pay rules state that if a part day is worked, this does not count as a day of illness and statutory sick pay is not payable. If an employer decides to apply this equally to occupational sick pay, it should pay employees their normal pay for a day on which they do some work before going off sick.

There are a number of other ways in which employers might deal with this situation. For example, it could depend on whether an employee has worked more or less than half of a day or shift. If an employee has worked less than half of a day or shift, the employer could decide to pay a normal day's pay, or to pay normal pay for half a day plus pay under the occupational sick pay scheme for half a day. Alternatively, the employer could consider the half day that the employee does not work as an occupational sick pay "waiting day", to be unpaid. The employer could decide to count this as the first day of absence for absence management purposes.

If an employee has worked half or more of a day or shift, the employer could decide to pay a normal day's payment and exclude the absence for absence management purposes.

The employer will need to manage partial days of absence closely. If an employee is not entitled to statutory sick pay or occupational sick pay, has exhausted his or her entitlement and/or has high absence levels that are being managed, he or she may attend work before going home sick in order to receive pay and avoid an adverse effect on his or her sick pay entitlement or attendance levels. If an employer observes this pattern with an employee, it could address this as a conduct issue through its disciplinary procedure.

Notification requirements

The employer should state in the scheme rules that the employee must comply with its sickness notification requirements to be eligible for occupational sick pay. The scheme rules could set out the notification requirements, or refer to them in a separate policy, such as the absence management policy. The reporting procedures could include:

  • whom the employee must contact;
  • the time by which the employee should make contact, for example by a particular time, or a minimum period prior to or after work start time;
  • the timescales for ongoing contact with the employer during the absence period, for example if the absence is for a short period the employee should make contact every day, but for a longer period this could be specified as once a week, or when new medical information or an update is available;
  • who should make contact - this should be the employee in person, unless there are circumstances that make this impractical, for example if the employee is in hospital or has lost his or her voice, in which case the employee should make personal contact as soon as he or she is able; and
  • the means by which the employee should make contact - requiring employees to report by telephone has the advantage of allowing the manager (or whomever the employee is required to contact) to question the employee directly and may discourage abuse of the system. The policy should be clear about whether or not email, text or social media messaging are acceptable methods for the employee to make contact.

The occupational sick pay rules should state that occupational sick pay may be withheld if the notification requirements are not met.

The employer should make clear that the notification requirements in its sick pay policy apply also for statutory sick pay purposes, and advise employees that statutory sick pay can be withheld if the employer's notification procedure is not followed.

Certification requirements

An employer is free to determine its own rules for absence certification for its occupational sick pay scheme, although it may decide to follow the same requirements as for the payment of statutory sick pay, where medical evidence cannot be required in relation to the first seven calendar days of illness. The employer could require employees to self-certificate for the first seven days of absence (see model self-certification form) and to provide fit notes thereafter, with self-certification being a requirement for payment of occupational sick pay.

An employer may decide to state in the scheme rules that it can request a medical certificate confirming incapacity for work at any point in a period of absence. This could be useful if the employer suspects that an employee's illness is not genuine. For example, an employer may apply this requirement for absences on and around public holidays, during annual leave or where a particular pattern of absence is emerging. GPs will normally charge a fee for medical certificates covering absences of less than seven days, in which case the employer should bear the cost.

The sick pay scheme rules should specify when and to whom employees must submit any self-certification document or fit notes, or refer to a separate policy where this is set out.

The employer must ensure that it complies with its data protection responsibilities when dealing with self-certification documents, fit notes and other records such as emails relating to employees' sickness absence. Access to these documents must be strictly limited to staff for whom it is necessary and the records must be kept secure. Information about employees' health falls into the special categories of personal data under the General Data Protection Regulation (2016/679 EU) (GDPR) (these are broadly the same as sensitive personal data under the Data Protection Act 1998). The GDPR is in force from 25 May 2018. An employer can process special category data where this is necessary for the purposes of performing or exercising employment law obligations or rights. To be able to process this data, the employer must have in place a policy document that explains how it will comply with the principles of the GDPR in relation to the special category personal data and that sets out its policies on retention and erasure of the data.

Sickness absence that coincides with annual leave

If an employee falls ill or is injured just before or during a period of annual leave and is consequently unable to take the holiday, he or she has the right to take his or her annual leave at another time, with the time off work treated as sickness absence. The sick pay policy could make clear that normal reporting and certification requirements to qualify for occupational sick pay will apply in these circumstances. Alternatively, the employer may decide to have separate rules to cover this type of absence, for example providing that only statutory sick pay is payable.

If the employee falls ill while overseas, the employer should be willing to accept foreign certification of the sickness, provided that it is reasonably satisfied that the certification confirms the illness or injury. The employer should make allowances if it would not be reasonable to expect the employee to meet the normal notification requirements. For more detail, see How to deal effectively with sickness that occurs during or just before a period of holiday.

Managing the sick pay scheme

The employer should define clear roles and responsibilities, stating who will manage the various aspects of the sick pay scheme, ie HR, line managers, payroll and/or occupational health staff. For example, the employer should set out who is responsible for:

  • ensuring that the policy and employment contracts are kept up to date;
  • training managers on the scheme and its implementation;
  • ensuring that the scheme is applied consistently and any discretion is applied appropriately;
  • communicating the policy to staff and responding to queries;
  • record-keeping and maintaining confidentiality;
  • ensuring that appropriate information is passed to payroll to ensure that accurate payments are made; and
  • investigating circumstances when considering withholding sick pay.

Communicating scheme details

The employer should have a communication plan for launching a new sick pay scheme (for guidance in this area, see How to communicate with employees on pay and benefits). Repeating the same key points in a variety of ways is the most effective way to promote a new scheme, explaining its benefits and reaching all employees. The employer should take the opportunity to demonstrate that it is providing an additional benefit as part of an overall reward package.

The employer can communicate the new scheme via any available method used in the organisation, such as through the employee handbook, at team briefings or by including letters with payslips.

The employer should ensure that employees who may not be working on the business premises are included in the communication strategy. This could include:

  • remote/homeworkers;
  • employees on maternity, paternity, adoption or shared parental leave; and/or
  • employees absent due to sickness.

As occupational sick pay is contractual, the employer will need to amend the contract of employment of employees covered by the scheme, which should be done by mutual agreement. As occupational sick pay is beneficial to employees, it is highly unlikely that an employee would not agree to such a change. The employer can make the change by issuing a new contract or via a contract variation letter.

In addition to launching the scheme, the employer should plan how it will communicate the scheme to new employees joining the organisation. Occupational sick pay is a considerable benefit, so there is also an opportunity to promote this in the recruitment process to help attract candidates.

For the launch, the employer should decide when the benefit will take effect, including how it will apply to staff already absent due to sickness. It may decide that the scheme will take effect from the launch date, or that it will apply only to new periods of absence after the date of introduction. However, employers should be wary of the risk of a disability discrimination claim if an employee is not entitled to occupational sick pay because he or she is already on disability-related sickness absence when the scheme comes into force.

Reviewing the sick pay scheme

The introduction of an occupational sick pay scheme should be designed to contribute to a strategic aim of the organisation, for example attracting or retaining staff. It is therefore important for the employer to ensure that the scheme is contributing to that aim, particularly as it has the potential to be a considerable cost to the employer. The employer should schedule periodic reviews to measure the effectiveness of the scheme.

The review should examine the factors that the business aims to achieve through offering occupational sick pay, balanced against the cost of the scheme. A review could include:

  • absence levels;
  • the cost of occupational sick pay;
  • levels of employee engagement since the introduction of the scheme;
  • feedback from a cross-section of employees, line managers, payroll and HR staff; and
  • any grievances related to occupational sick pay, including any claims of discrimination.