Permanent health insurance and obligation to cover payments under TUPE
The Employment Appeal Tribunal (EAT) has held in Amdocs Systems Group Ltd v Langton that an employer was liable to pay the level of income protection payments set out in an offer letter and summary of benefits provided by the employee’s original employer prior to a TUPE transfer. The employer was contractually bound by terms provided by a previous employer before a TUPE transfer because it hadn’t clearly communicated any limitation of that entitlement to the employee.
Permanent health insurance
Permanent health insurance (PHI) – otherwise known as income protection, provides income to individuals unable to work due to long-term illness or incapacity via an insurance policy taken out by the employer for the benefit of employees. If employees satisfy the criteria under the policy they usually receive a fixed percentage of their usual salary, sometimes up to 75% for a set period or a lump sum settlement period if they elect to come off the income protection scheme and to receive a one off lump sum. PHI can be an invaluable and irreplaceable benefit for employees on long term sick leave.
As this case demonstrates, employers should be wary of creating a freestanding contractual (express or implied) obligation to employees to pay benefits. If the insurer rejects the claim, but the terms of the insurance policy are not effectively incorporated into the employment contract, the employer may be liable to pay sums to the employee in any event, for which it is not insured.
Amdocs Systems Group Ltd v Langton
Here, the claimant started working for Cramer Systems Ltd (Cramer) in 2003 under terms set out in an offer letter, a summary of benefits and a contract of service. The offer letter and summary of benefits set out the terms of a long-term sickness absence scheme and the level of income protection payable, including an “escalator” of 5% per annum after the first 52 weeks.
In 2006, the claimant’s employment transferred under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) to Amdocs. The claimant was told that the level of income protection under the long-term sickness absence scheme had stayed the same. However, when he took long-term sickness absence in 2009, he was told that the escalator no longer applied, as it had ceased to exist under that scheme in 2008. He brought a claim for unlawful deduction from wages.
The EAT found that his contract of service, offer letter and summary of benefits were all contractually binding. This meant that he was entitled to receive the escalator, which the employer would have to fund themselves, given that it was no longer provided for under the terms of the insurance policy.
- Employers should document clearly that any liability it may have to make PHI payments will be limited to the amounts received from the scheme insurer.
- In a situation where there is a TUPE transfer the transferee should check carefully the level of PHI benefits that are provided for the benefit of employees by the transferee and whether it can replicate those benefits under a policy of its own.
- The EAT made the point that if an employer wishes to limit its payments under such a scheme those limitations must be clearly expressed or made known to the employee. In this case the employee/claimant had not been given access to the insurance policy terms or any other document that would set out or explain the finer details.
- In summary the decision in Langton serves as a useful reminder to transferees to check the level of permanent health insurance benefits provided by the transferor. It also shows how important it is to make it clear in contractual documentation that any liability to make PHI payments to an employee will be limited to the amounts received from the scheme insurer to avoid any additional liabilities arising.
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