Employers could find themselves liable to employees for any permanent health insurance (PHI) benefits that are not fully covered by the employer’s insurance policy. The Court of Appeal in Amdocs Systems Group Ltd v. Joel Langton [2022] EWCA Civ 1027 upheld the EAT’s decision that the employer’s liability in relation to PHI benefits was not limited by the terms of the employer’s insurance policy.

Background

The Claimant was employed by Cramer Systems Limited which, after an acquisition and re-organisation, became the Respondent. In 2003, the Claimant received an offer letter, contract of employment and a summary of benefits. These documents set out the Claimant’s entitlement to income protection payments (IPP) in the event of a long-term sickness absence; he was entitled to 13 weeks of full pay and subsequently, 75% of his annual salary until his 60th birthday (such payments were less statutory benefits). His entitlement also included an “escalator” under which, after the first year of sickness absence, payments would increase by 5% every year to respond to inflation.

The Claimant went on long-term sick leave in June 2009 and had been in receipt of IPP for the whole period since. In 2016, the Claimant’s solicitors realised that the Claimant’s IPP payments had not increased by 5% each year as per the “escalator” entitlement. Unable to resolve this directly with the Respondent, the Claimant’s solicitors initiated unauthorised deduction of wages proceedings on behalf of the Claimant in 2018. The Respondent argued that whilst yes, the “escalator” provision did apply from 2003, it was revoked in 2008 when the Respondent changed insurance provider and took out a new insurance policy which had no such mechanism. The Respondent’s Group Income Protection Insurance Policy (dated 2008) did cover the 75% of annual salary entitlement, but it did not include the 5% “escalator” for each year.

ET and EAT decisions

The Employment Tribunal found in favour of the Claimant and held that the mismatch between the Claimant’s contractual entitlement and the Respondent’s insurance policy was not relevant, the Claimant was entitled to the 5% “escalator” as it was incorporated into his contractual terms.

On appeal to the EAT, the Respondent argued that the wording in the summary of benefits that had been provided to the Claimant limited its liability. The summary stated “the operation of both schemes [which included the IPP scheme] is governed by the terms of the group policies and nothing will override the terms of that document”. The Respondent’s position was that this limited its liability to the level of cover available in the actual insurance document, and therefore any liability not covered by the insurance policy did not lie with the Respondent.

The EAT rejected that argument holding that if there is any ambiguity or uncertainty as to whether the employer’s liability is limited by reference to the specific terms of the employer’s insurance cover, the onus is on the employer who seeks to rely upon that ambiguity. In cases where there is a divergence between a contractual entitlement and the actual policy document, that difference must be explicitly communicated to the employee in order to limit the employer’s liability, so there can be no doubt about it. In this case, the Respondent had not made the changes to the cover or the purported limit clear to the employee and, therefore, the contractual entitlement applied to override the terms of the policy.

Court of Appeal decision

In its recent decision, the Court of Appeal dismissed the Respondent’s further appeal. It held that it is common for contracts of employment to be contained across multiple documents and, in this case, one such document was the summary of benefits, which was incorporated into the contract and included the “escalator” entitlement. The Court of Appeal took a number of considerations into account when arriving at its decision, three of the key points being:

  • Where there is no wording in the employment contract to confirm that the terms of an existing policy are capable of replacement by a subsequent (and potentially less favourable) policy, an individual’s employment terms will incorporate the terms of the policy (or policies) that were in place when the employment contract was entered into. For the purposes of this issue, that meant the escalator wording continued to be incorporated into the Claimant’s contractual employment terms.
  • If there is any obscurity about an employer’s contractual obligations to provide certain benefits, that ambiguity will be interpreted in the employee’s favour in such circumstances. Therefore, in order for the actual terms of any new insurance policy to limit the Respondent’s liability to the Claimant, these new and less favourable terms should have been clearly communicated to the Claimant such that it was beyond doubt.
  • Despite the fact that the contractual documents referred to the insurer, the documents did not go on to provide that the Claimant’s contractual entitlement only arose if the Respondent obtained payment from the insurer.

Implications for employers

Employers should take notice of this case as a cautionary tale. The key message is around the importance of unambiguous contractual wording.

It is common practice for employment contracts to be spread across multiple documents. Therefore, employers should ensure that these documents are aligned and that they do not, when read in isolation, inadvertently create any discrete rights that provide a greater contractual entitlement than is covered by an underlying insurance policy. In particular, employers should check that any contractual entitlements to insurance covered benefits align with their insurance policies. Merely making a passing reference to the existence of a policy that is in place at the time of entering into a contract is unlikely to go far enough.

Given the reality that employers will often look to change their insurance policies or providers from time to time, it is prudent for contractual documents to provide scope for future changes by confirming in clear terms that:

  • any insurance-backed benefits, such as private medical insurance or PHI are governed by the rules of the insurance scheme and its eligibility criteria, as amended from time to time;
  • the employer will only cover the employee to the extent that the insurance provider first makes the requisite payments to the employer and any failure in the insurance company’s obligations will not bind the employer to making equivalent payments;
  • the benefit can be varied or withdrawn; and
  • the level of cover, provider or benefits offered under any scheme can be updated and varied at the employer’s discretion at any time.

Unfortunately, although raised in the tribunals, the Court of Appeal was not asked to consider the issue of when and how employers are legally permitted to unilaterally vary an employment policy as the argument was dropped. However, employers seeking to do so are advised to check that first, the contractual wording permits such a variation and, second, makes it explicitly clear that the benefits provided to that employee are determined by the policy in place from time to time.