Contract and PHI insurance mismatch proves an expensive mistake

Out-Law News | 14 Sep 2021 | 8:31 am |

Gill Ross tells HRNews about the EAT’s decision in Amdocs Systems v Langton and the cost of failing to insure against PHI benefits


We're sorry, this video is not available in your location.

  • Transcript

    The EAT has handed down a useful reminder of what can happen if an employer offers PHI benefits but fails to keep the cost of them fully insured. The mistake arose in the context of a TUPE transfer and was the result of the new employer, the transferee, failing to get to grips with inconsistencies in the contractual documentation. It proved to be an expensive mistake. The case is called Amdoc Systems v Langton and we’ll examine the lessons to take from it shortly, but first the facts briefly.

    The claimant was a Mr Langton who was employed by Cramer Systems from 2003. He received an offer letter, a contract of employment and a Summary of Benefits. Both the letter and the Summary of Benefits set out the terms of a long-term sickness absence scheme, PHI,  and the level of payments under it. These included reference to an ‘escalator’ of 5% per annum which would apply after the first year. As you’d expect, Cramer had insurance cover in relation to its obligation to pay the benefits under the PHI scheme, income protection that included the 5% escalator. In 2006 Amdoc Systems acquired Cramer following a TUPE transfer and, as the new employer, Amdocs reassured Langton that his PHI benefits would not be affected, something which was confirmed in a subsequent letter to him and in a form which Langton signed. In 2008 Amdocs changed its insurance policy to one that didn’t provide for a 5% escalator, or any annual increase. Then in 2009 Langton began a period of long-term sickness absence. 

    As the years went by Langton remained on long-term sick leave and received his PHI benefits and assumed those payments included the annual increase of 5% However, in 2016 he discovered that the increase had not been applied and would not be applied. He queried that and Amdocs told him he was not entitled to it because the escalator had ceased to be part of the PHI scheme in 2008, when they changed their insurance policy, and Langton didn’t take sick leave and start claiming until 2009 by which time the escalator had been dropped. Langton went on to bring a claim against Amdocs for unlawful deduction from wages relating to the failure to apply the escalator. At tribunal Amdocs ran the argument that the wording of the original Summary of Benefits helped them. They said that document made it clear that the operation of the PHI scheme was governed by the scope of any insurance protection that might be in place and so when they changed their insurance policy in 2008 that change was provided for and was binding on Langton. 

    The tribunal rejected that argument and so Amdocs appealed. The EAT dismissed the appeal on the basis that the wording in the Summary of Benefits, cutting back such an important benefit, would need to be expressly drawn to Langton’s attention and that didn’t happen - Langton hadn’t been given the insurance policy terms or any other document spelling them out. So in short, it was a contractual mess that Amdocs had failed to get to grips with and they remained liable for full amount including the 5% escalator. 

    So, let’s get some reaction to this decision and what employers can take from it. Gill Ross joined me by video-link from Glasgow to discuss the case:

    Gill Ross: “Well this is a real cautionary tale for employers. If you don’t get the contractual wording, right, whether that's in an employment contract itself, a Summary of Benefits, the staff Handbook, any sort of ancillary documents that sit alongside an employment contract, it can lead to unforeseen financial liability for employers. Where they've got insurance-backed benefits like group income protection, PHI, even things like private medical insurance, it needs to be explicit from the outset of the employment relationship that these benefits are governed by the scheme rules, they are covered by only the extent that the insurance policy will cover them, and this is where the employer in this case got into difficulties because the insurance policy changed and they didn't cover the gap in benefits that the employee had had under their predecessor employer.”

    Joe Glavina: “The obvious danger is where an employee's contract refers to other documents for incorporation. So here is it was a Summary of Benefits and the benefit was PHI, but you mentioned the Staff Handbook which might also include various benefits. So the question is can this problem arise with the Staff Handbook which HR might have made changes to at some point?

    Gill Ross: “Yes it can. It might be that when employers take an approach to drafting employment contracts it's maybe a bit more legal. Employment contracts do tend to be a bit more plain-English than you would see in commercial documents, but there can be ambiguity between an employment contract and the Staff Handbook. So where you've got a promised benefit in a contract of employment around PHI, what's reflected in the Staff Handbook might not measure up with that and that particularly can be a difficulty where there has been a TUPE transfer, where you've got staff coming in who may have a contractual entitlement to a certain level of PHI cover and then the new employer can't provide that same level of cover and it might be that they move on to their Staff Handbook as part of the measures and there’s just never really a reconciliation done between the levels of cover that are provided under the employment contract and the Staff Handbook. So I would say in that situation, where there has been a transfer of employees, that there needs to be a due diligence exercise to make sure that what is covered by the transferees insurance policy is matching what the enticement is for the employee under their employment contract and the employer either has to look at increasing their insurance cover to make sure that contractual entitlement is met otherwise they could be left with a liability that the employer needs to fund themselves that's not covered by the insurance, or they would need to advise, as a measure, that there's going to be a change to the level of insurance cover.”

    Joe Glavina: “You mention the importance of due diligence and checking for inconsistencies in the documents, I’m guessing that could be a real issue in a TUPE setting?”

    Gill Ross: “Yes it could be, and it could be something that just slips through the net because you maybe will get a Schedule of Benefits through from the outgoing employer that will say there's PHI cover, say it’s 75% after 26 weeks of absence, that's what's covered, but there might be more to than that. So in this case there was this 5% escalator, I think they called it, and that might not be listed out specifically so you kind of relying on the outgoing employer providing you with the correct data. So the incoming employer, the transferee, really needs to try to interrogate the data and the information and the documents that they get as much as possible to ensure that there isn't that gap because what you don't want to find out is that somebody then goes on to PHI, is absent for, you know, 10 years and the transferee has a huge liability because there's a gap in the contractual entitlement and what they are able to recover under their insurance policy. So that's why it's critical, I suppose. The main two points I would make are, in the contractual documentation get it right at the outset, make sure that it's absolutely clear and unambiguous that any payments that are due to the employee are governed by the scheme rules and limited by what the employer can recover under the insurance policy. Also in the TUPE transfer scenario, really make sure that everything is matching up because I would say PHI is probably the biggest risk in terms of financial liability because it can lead to employers having to either self-fund the whole amount if they don't have an insurance policy in place, which I have unfortunately seen for one client, or they're left with that gap in terms of the insurance cover and what they have to pay out to employee under their contract.”

    Joe Glavina: “Final question Gill. How expensive can it be to not have the PHI benefit properly covered? 

    Gill Ross: “It can be incredibly expensive. So, say for example you've got somebody who has a contractual entitlement to 75% of their salary, they could go off sick on a permanent basis aged, say, 35 if they have a serious accident, unable to work, and they could be on that for the rest of what would have been the working life. So, if you're looking at that over maybe a 30 year period that's an incredibly expensive benefit for an employer to have to cover themselves. If it’s just a gap in terms of the financial liability that's maybe not as significant but, as I say, I saw one situation where the employer had, I think, just let the insurance policy lapse and then somebody did trigger the long term health payments and the employer had to fund it themselves because they didn't have insurance in place.”

    That case is the EAT’s decision in Amdocs Systems Limited v Langton. We have put a link to it in the transcript of this programme.

    - Link to case report: Amdocs Systems Group Ltd v Langton