Are employers under any legal obligation to look after their employees’ ‘economic well-being’? Should employers give employees financial advice to ensure that they take informed financial decisions, for example, about their insurance benefits and pension? Should employers warn employees if they look likely to take a decision which could have serious negative financial consequences for them?
Traditionally the Courts have emphatically said no!
However, a decision of the Pension Ombudsman given on 22 December 2015 has suggested the answer just might be maybe! Specifically the Ombudsman said that the employer had a ‘duty of care’ to provide the employee with the ‘salient information’ about the implications of a decision he was proposing to take.
The Courts’ approach
With a few very limited exceptions, the Courts have repeatedly confirmed there is no duty to protect an employee’s economic well-being. So there is no implied term in an employee’s contract of employment nor is there any general principle of law, for example under tort, creating any such duty to look after an employee’s finances. This means that if an employee takes a poor financial decision the employer does not have to warn the employee of the consequences of their actions.
Examples where employees have lost out in past cases include:
- failing to join an occupational pension scheme and losing valuable pension and death-in-service benefits;
- taking early retirement just a few days before their pension benefits were due to have dramatically increased;
- resigning when on long term sick and losing out on valuable income protection insurance payable only to employees.
The Pension Ombudsman decision
This new case concerned a policeman leaving the force and re-joining after a brief break. This decision led to a significant tax liability in relation to his pension benefits. In practice, he could have easily avoided this liability by delaying his return to the police force by a further (but short) period of time.
The question was whether the employer should have protected the employee by pointing out this issue before he incurred the tax liability.
The Police Commission argued, and the Ombudsman accepted, that there is no legal duty to give financial advice about an employee’s tax and pension liabilities – it was up to the employee to take their own personal financial advice.
However, the Pension Ombudsman held that this was not really about giving financial advice. Rather, it was about giving the employee the appropriate information to enable him to take an informed decision. In failing to provide the ‘salient information’, the employer was in breach of its duty of care and was ordered to pay the additional tax liability in full.
Where does this leave employers?
It is dangerous to read too much into this case. As a decision of the Pension Ombudsman it only relates to pension issues. It also arose out of a unique set of circumstances applying specifically to police pension benefits.
However, the general principle appears to be that employers should, at the very least, give employees the basic information they need to take informed financial decisions about their pension.
This is consistent with some of the limited exceptions to the general rule mentioned above that employers do not have to give financial advice. In exceptional cases, where an employee loses out on a valuable contractual benefit which he could not have reasonably known about, the Court has held that it was necessary to imply an obligation to bring that benefit to the employee’s attention.
However at best this is just an obligation to make sure the employee has the information needed to take a decision; it is not an obligation to provide formal financial advice – i.e. in the sense that there is no obligation to advise the employee what they should do.
Indeed, from a legal perspective an employer can find itself exposed if it tries to do the right thing and give an employee financial advice. In offering such advice the employer potentially takes on a duty of care to ensure the quality of that advice – so if the well-meaning advice turns out to be incorrect the employer could be liable for the employee’s losses. Given that financial advice is so heavily dependent on the unique circumstances of the individual, taking into account their personal situation, financial affairs and objectives (the detailed ‘fact finding’ exercise that any reputable independent financial advisor would conduct) it is exceptionally risky for an employer to provide financial advice.
The correct balance seems to be that the employer should provide the employee with the information they need to take an informed decision and should advise them to take independent financial advice – but avoid the temptation to go further and tell the employee what they should do.
Finally this new case seems to suggest that the Pension Ombudsman is increasingly willing to become involved in territory traditionally regarded as general employment issues for the Courts and Employment Tribunals.