In Amdocs Systems Group Ltd v Langton, the Employment Appeal Tribunal (EAT) held that an employer was liable to pay ‘escalator’ payments under a long-term sickness scheme, even though they were no longer covered by the employer’s insurance policy. 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.

What's the issue?

Permanent health insurance (PHI) – otherwise known as income protection - provides income to individuals unable to work due to long-term illness or incapacity.  Typically, employers offer PHI to employees by taking out a policy with a third-party insurer.  If employees satisfy the criteria under the policy they usually receive a fixed percentage of their usual salary (i.e. 50%) for a set period.  

However, employers should be wary of creating a freestanding obligation to employees to pay benefits, regardless of whether the insurer pays up.  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 for which it is not insured.  

What are the facts?

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. 

What should employers do now?  

1. Check your contracts.  Have you clearly documented that any liability to make PHI payments will be limited to the amounts received from the scheme insurer for that purpose?

2. Watch out for TUPE transfers.  Transferee employers on a TUPE transfer should always carefully check the level of PHI benefits provided by the transferor to any transferring employee, and whether it will be fully covered by their existing insurance policy. 

3. Treat any exclusions or qualifications with care - and ensure that these are brought to the employee's attention.   The EAT emphasised that any limitation of the employer’s exposure must be unambiguously and expressly communicated to the employee, so that there can be no doubt about it.  Further steps would need to be taken to bring any changes to particular terms to the employee's attention to be effective. Here, the claimant had not been given access to the insurance policy terms or any other document with the details of those terms.

4. Remove any ambiguity. Be aware that any remaining ambiguity or uncertainty regarding the employee's entitlement will be resolved in favour of the employee. This follows the common law rule that any ambiguity as to whether a provision applies is to be applied against the party who seeks to rely on it. It would be wise to review and, if necessary, simplify, any drafting so that the position is clear and certain.