Employment benefits: was an employee contractually entitled to annual increases in his PHI payments?
Permanent health insurance (PHI) or income protection cover is a popular contractual benefit offered to staff. If a worker has a long-term illness and cannot return to work, the cover provides them with a percentage of their salary. Although some employers self-fund this benefit, many take out insurance cover. The Court of Appeal has recently considered whether an employee was contractually entitled to annual increases, which were not covered by the insurer, in the payments he received under an income protection scheme.
When L, a test engineer, commenced employment he was given various documents that set out the level of income protection cover he was entitled to under a long-term sickness scheme. The documentation included reference to an ‘escalator’ of 5% per annum, which would apply after the first 52 weeks of income protection payments. This ‘escalator’ was designed to ensure that inflation did not erode the level of cover over time. L began a period of long-term sickness absence and began to receive income protection payments in 2009. After L’s employment TUPE transferred, he noticed that the income protection payments he was receiving did not include the annual escalator. The new employer said that its underlying insurance cover did not provide for the ‘escalator’ to be applied to income protection payments. L brought a claim for unlawful deduction from wages. The employment tribunal upheld L’s claim and held that L was contractually entitled to the annual escalator payments. That decision was later upheld by the EAT, so the employer appealed further.
The Court of Appeal dismissed the employer’s appeal and upheld the tribunal’s decision that L’s employer was contractually liable to pay L the annual escalator payments. The offer letter, and the summary of benefits provided to L, had been clearly incorporated into the contract. The employer’s contractual obligation to L was to procure the payment of the benefits set out in his contract. There was nothing in L’s contract to limit the payments due to those payable under the policy in force from time to time. L’s employer was bound by the contractual commitment it had inherited from his previous employer on his TUPE transfer. The fact that the employer had chosen to arrange insurance cover that did not provide for the escalator payments, was not, on its own, sufficient to limit the employer’s contractual obligation towards L.