Statutory Sick Pay Percentage Threshold (Revocations, Transitional and Saving Provisions) (Great Britain and Northern Ireland) Order 2014
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Lord Bates
That the Grand Committee do consider the Statutory Sick Pay Percentage Threshold (Revocations, Transitional and Saving Provisions) (Great Britain and Northern Ireland) Order 2014.
Relevant document: 19th Report from the Joint Committee on Statutory Instruments.
Lord Bates (Con)
My Lords, in my view the Statutory Sick Pay Percentage Threshold (Revocations, Transitional and Saving Provisions) (Great Britain and Northern Ireland) Order 2014 is compatible with the European Convention on Human Rights.
I am aware that there are minor typographical errors in the draft order before the Committe. These do not affect the meaning of the order and they will be put right if Parliament approves the order and it is signed and reprinted.
By way of background, every year, more than 130 million working days are lost to sickness absence with huge associated costs to employers, employees and the wider economy. For example, sickness absences cost the economy around £15 billion a year, predominantly in lost output. Employers face an annual bill of around £9 billion for sick pay and associated costs, and individuals miss out on £4 billion a year through lost earnings. In addition to this, around 300,000 people a year fall out of work and into the welfare system because of health-related issues.
The state spends around £12 billion a year on health-related benefits and £2 billion a year on healthcare, sick pay reimbursement and forgone taxes. The levels of sickness absence and the effect on individuals, business and the economy are clearly a cause for concern and the Government must do what they can to address these issues. We know that, in general, being in work improves well-being. There is a strong correlation between remaining in work and positive health and well-being outcomes. This is why, back in 2010, the Government commissioned an independent review of sickness absence to investigate the current system. The aim of the review was to find ways to minimise the loss of work through ill health and to reduce the burden on and costs to employers, individuals and the state.
As noble Lords will be aware, the review was published in 2011. It made a number of observations and recommendations to improve the effectiveness of restoring people to work including: the abolition of the statutory sick pay percentage threshold scheme, which offers limited reimbursement to some employers for statutory sick pay costs; the creation of an independent, state-funded health and advice service available to employees, employers and general practitioners; and tax incentives to encourage active sickness absence management.
By way of background, employers have a responsibility to pay statutory sick pay to qualifying employees who are absent from work due to ill health. The weekly rate of statutory sick pay is currently £86.70 and it is payable for up to 28 weeks. The percentage threshold scheme allows employers to claim reimbursement of statutory sick pay costs when they reach above a set percentage—in this case, 13%—of their monthly national insurance liability.
Returning to the review, the Government agreed with the reviewers, Dame Carol Black and David Frost CBE, that the percentage threshold scheme can be seen to financially reward employers where sickness absence is highest and provides no incentive to manage sickness absence in the workforce. This was not the intention of the scheme when it was introduced in 1995. Therefore, the Government have accepted the recommendation to abolish the statutory sick pay percentage threshold scheme. This is part of a wider programme of measures to encourage a more proactive approach to managing sickness absence in the workplace by both employers and employees. The abolition of the scheme gives us the means to invest into establishing the recommended state health and work assessment and advisory service. To be known as the health and work service, it will be implemented in Great Britain in 2014 and will ensure that public funds are used to tackle sickness absence in a more effective and targeted way than the percentage threshold scheme.
The proposed new service has been broadly welcomed by business. For the first time many smaller businesses will have access to work-focused occupational health assessment and advice, which will support an earlier return to work for their employees. To further help employers, the Government are planning a tax exemption for any health-related interventions funded by employers for their employees, as was recommended by the independent review.
In conclusion, I am sure that your Lordships will agree that the money currently spent each year on the percentage threshold scheme will be more effective when reinvested into the new health and work service. We expect a reduction in lost working days and an earlier return to work for many employees. In return, this will bring benefits to business, employees and the wider economy. I commend the order to the Committee.
Baroness Sherlock (Lab)
My Lords, I thank the Minister for that explanation. I woke yesterday morning to hear on the radio an announcement about a wonderful new scheme the Government are planning to introduce called the health and work service, which would cover England, Wales and Scotland. I wonder what happens in Northern Ireland. I am not sure I caught that. This scheme would offer voluntary medical assessments and treatment plans for employees. There was nothing in that bulletin to inform the listener that this would be paid for by scrapping the percentage threshold scheme, or PTS, which enables employers to reclaim some of the costs of statutory sick pay, or SSP, from the state. I will be charitable and assume that this is because Parliament has not yet approved this order. I know that Ministers are loath to let anything slip out to the media before Parliament has had the opportunity to scrutinise it in great detail—although I confess that, somehow, the BBC had got hold of that side of the story on its website a little later.
These regulations abolish the percentage threshold scheme, and we are assured that stakeholders welcomed the change, apart from one employer representative group which was concerned about the impact on small employers of removing the remaining element of SSP reimbursement. We were told that the average amount claimed under the scheme in 2009-10 was £500 per year, per claimant—that is, per employer claiming. That may not sound a lot, but the impact assessment also tells us that micro-employers, those with fewer than 10 workers, receive 70% of the recovery, and £500 can be a lot of money to a micro-employer.
I know of a church in Durham, where I live, the sole employee of which is a rather wonderful youth worker; the vicar, of course, is paid by the diocese. Sadly, the youth worker has been off sick for some months. It was a big decision for the church to hire her, but it decided to dip into its reserves to hire a youth worker to work not just with the children in the church but children in the local community. Unfortunately, she has developed a condition which means that she has been off sick for some months. She is brilliant and the church does not want to lose her, but money is tight. Thanks to the PTS, it has been able to get some of the SSP back, so it can afford to pay a locum to do at least some of the work. At the moment, a locum youth worker is running a wonderful club for a few weeks for year 6 children in the neighbourhood to help them prepare for moving up to secondary school. However, my point is that £500 to that church is a lot of money. Can the Minister tell the Committee whether the Government have talked to micro-employers about the likely impact of this change on their operations? According to the Black review of sickness absence, micro-employers represent 82% of employers; obviously, they represent a smaller percentage of employees, but that is a lot of employers.
The argument made in the Black review is that PTS compensates mainly small employers for “higher-than-average sickness absence” but fails to promote attendance management; I think that was the point the Minister was making. That seems to me to fail to distinguish between two things that were rammed home to me in business school in assessing sickness absence in an organisation: the number of periods of sickness and the number of days of sickness. If you have a lot of periods of sickness, a lot of employees off for a small number of days, that can tell you something about whether people are taking sick leave a lot and it can tell you something about morale. The total number of days can be completely skewed in a small organisation by one person having a very serious illness. I did not see that distinction made. A good example would be this church, which would look as though it had a terrible sickness record but that is because one youth worker happened to develop a condition.
I am trying to draw this out, because I wonder if the Minister could help me to understand. The assumption is that those who get most of the money are small organisations with higher than average sickness absences, which therefore fail to promote attendance management. I wonder whether the evidence backs that up. Can the Minister help me to understand that rationale? The impact assessment says that the abolition of the PTS removes a transfer of some £50 million from the Exchequer to businesses and that the new health and work advisory service will generate a net value of around £70 million for employers—£120 million in benefits minus £50 million in intervention costs, I gather. There will also be a presumed benefit to the state.
The Minister can correct me if I am wrong, but my understanding is that that means that all the current spend on the PTS of £50 million is being recycled into the new scheme. Can the Minister confirm that? The assumption is therefore that businesses are not losing out. However, if that is true, what calculations have been made as to how evenly the gains and losses will be distributed? After all, if 70% of the benefit of the PTS goes to micro-employers, is it assumed that 70% of the benefits of the new service will be enjoyed by micro-employers? The impact assessment says that smaller employers are expected to benefit disproportionately, as they are less likely to have their own rehabilitation and occupational health services, but it did not quantify that. Can the Minister tell the Committee if any assessment was made? If so, what is the distinction? Within smaller employers is a large group: micro-employers are those who have fewer than 10 workers. Was any distinction made between those two categories?
A crucial question is whether the fact that in future employers will bear the full cost of SSP is likely to have any effect on their willingness to hire or retain staff whom they may judge likely to need it. In other words, will they discriminate against staff who have a potential health issue or have had a health record in the past that gives them cause for concern? The impact analysis does not address that directly, but under the heading “Key Assumptions/Sensitivities/Risks” it includes the following assumption:
“The removal of the PTS doesn’t precipitate (illegal) discrimination by employers against employees with poor sickness absence records”.
Can the Minister tell the Committee what evidence underpins that assumption? I am not saying that that will happen but I would be glad to know why the noble Lord, Lord Freud, felt sufficiently confident that it would not to sign off the impact assessment without that assumption spelt out in it.
My other question about these regulations relates to whether there is any risk that employees will be less likely to receive SSP under the new system. In consequence of the abolition of the PTS, the Government have also produced a set of regulations which have not yet taken effect, which propose to abolish the requirement on employers to maintain records for each employee relating to sickness absence and the payment of SSP for three years after the end of the tax year where SSP was paid. I refer to the Statutory Sick Pay (Maintenance of Records) (Revocation) Regulations 2014.
Can the Minister tell us what risk assessment the Government have undertaken as to the likelihood of employers not paying SSP correctly or at all once the record-keeping requirement is abolished alongside the order we are discussing today? The Explanatory Note which covers both orders tells us that HMRC will retain the power to require an employer to produce records to show them that SSP has been paid appropriately. What discussions has the department had with HMRC to satisfy itself that there will not be an unintended consequence of some employees not getting the money to which they are entitled? The Explanatory Note also says:
“Stakeholder engagement found that employers maintain records of sickness absence for payroll, tax and other staff management reasons”.
Can the Minister confirm that those stakeholders include individuals from or representing micro-enterprises?
Finally, the 2011 Black review on sickness absence recommended that the Government should carry out further research into the reasons behind the significant number of people claiming ill health benefits who come straight from work, especially from smaller employers. That is the earlier Black review. It recommended that the Government carry out further research into the reason why significant numbers of people claiming ill health benefits who come straight from work appear not to have been paid sick pay by their employer beforehand. Has that been done?
My very final question is that the impact assessment notes that HMRC periodically visits businesses to see if their payroll is running smoothly and it reviews payroll documentation including SSP and sickness absence records. Can the Minister clarify whether on those visits HMRC will still routinely review SSP records? I look forward to the Minister’s reply.
Lord Bates
I thank the noble Baroness for her questions and for the case study she gave us from the diocese of Durham, which of course I have a strong affinity with and want to see everything possible done to help. In considering that, the best thing that could happen to any small employer in that situation is that the employee returns to the workplace. The question is whether, through this reallocation of the resource from the threshold scheme to the health and work service, it is more likely that the person concerned will find a pathway back to the employer and the workplace, which is the best solution all round. Our view is that it will and that it is a better use of the resource.
The noble Baroness asked how the £50 million that is currently paid under the threshold scheme will be allocated. It will be used to fund the health and work scheme and the tax exemption for interventions which was announced in the Autumn Statement. Where interventions are recommended to get somebody back to work which incur a cost—for example, the provision of physiotherapy or a particular piece of equipment or a change in working practices—the employer will be able to offset that cost. Many large national or multinational companies have sophisticated HR departments which seek to address all these issues to get employees back into the workplace as soon as possible. However, micro-employers do not have that facility. They will be able to take advantage of the new scheme and make some savings as a result of it. That is one of the reasons why it is widely welcomed by them. Micro-employers will benefit more than larger employers for the reasons I have outlined.
Less than 10% of micro-employers make claims under the percentage threshold scheme, which raises another point that the scheme is so complicated and complex that many micro-employers who could benefit from it do not take advantage of it at present because they do not appreciate that it is there. We hope that with the publicity surrounding the new way of working through GPs and employers and employees, more will take advantage of the service, and that will be to the benefit of all. Micro-employers currently receive around 70% of the money paid out under the scheme. The average claim under the scheme is less than £500 a year, but this masks considerable variation. For example, around 25% of micro-employers claimed less than £200 in 2008-09.
The noble Baroness asked about a particular church employee. The health and work service will support the employee and the employer in the diocese to try to find a plan to enable the person concerned to return to work under the new scheme. She also asked why the scheme will not apply to Northern Ireland. However, this is a fully devolved matter for Northern Ireland and therefore it will make its own decisions on how the scheme will operate. The health and work scheme will apply just to England and Wales.
The noble Baroness asked about the abolition of associated SSP record-keeping. Employers will still need to maintain SSP records for pay-as-you-earn and tax purposes. There is no evidence to suggest that employers will not meet their SSP obligations as a result of record-keeping abolition. The HMRC statutory payments disputes process will continue to ensure that employers meet their obligations. There will be ongoing monitoring of disputes and the actions which are taken.
I think that that covers many of the points which were made. However, the noble Baroness may be about to tell me—
Baroness Sherlock
I would hate to disappoint the Minister and I thank him for going through so many of my questions.
I have a couple of specific points. His answer to my concerns about the record-keeping point was that the Government assume that since employers keep records anyway, there is no reason to assume they will cease to keep them. They say that in its routine visits HMRC currently inspects payroll records, including SSP records. Is it the intention of the Government that it will continue to inspect SSP records on these visits, even though companies are not specifically required to keep them in the form that is described here? The suspense is killing me—I look forward to hearing that answer.
Can the Minister explain again the position of micro-employers? My understanding was that 70% of the benefit was going to micro-employers, but I think he said it would be only 10% of the claims. Perhaps he could help me to understand that. The point I was trying to draw him out on, about the fact that the new service will more than compensate for the loss of the PTS, was that I can see that across populations that is true but if, as a micro-employer, you have only one or two employees and they cannot be got back to work because of the nature of their conditions, they will lose out. Was any thought given to whether they might be protected from that in some way?
Lord Bates
The noble Baroness asked about the HMRC visits. I am delighted to give her the answer, which is yes. She also asked for clarification on the 10% figure. I said that less than 10% of micro-employers make claims under the percentage threshold scheme, which I think was the point she was asking for clarification on.
I hope that noble Lords will agree that the abolition of the percentage threshold scheme is important so that savings can be reinvested in the new health and work service, which will benefit both employers and employees in reducing lost working days and increasing economic output. I commend the order to the Committee.