KNOWLEDGE

High cost of lack of clarity

Morton Fraser Partner David Hossack
Author
David Hossack
Partner
PUBLISHED:
31 August 2022
Audience:
Business
category:
Blog

Lack of clarity in contractual documentation, particularly when insurance backed benefits such as income protection are involved, can lead to significant costs for employers

Contractual terms of employment are often spread across a number of documents.  That can include the main contract, some handbooks may have contractual effect, as well as offer letters and benefit summaries.  While this is common practice, it can be time consuming to ensure that the terms of all these documents are aligned, particularly as years pass by.  Insurance backed benefits such as income protection schemes bring in the potential for additional problems such as when the terms of policies, or indeed policy providers, change.  Losing track of the contractual terms under which staff are employed is easy to do but potentially costly.

A recent Court of Appeal case has highlighted how employers may get into difficulty.  In Amdocs Systems Group Limited v Joel Langton the claimant was engaged in 2003 on terms which were set out over a number of documents.  The contractual benefits included an income protection plan that was stated to have an initial benefit of 75% of salary plus an annual 5% increase on the payments to reflect inflation.  In 2008 a new insurance provider was appointed with the new income protection policy no longer including the 5% annual increase.  In 2009 the claimant went off long term sick and benefited from the income protection scheme. In 2016 the claimant realised he had not received the annual 5% increases he thought was due and a claim for unlawful deduction of wages was made.  The employer argued that the claimant was not entitled to the annual increase as that benefit had been lawfully removed in 2008 before the claimant applied for the benefits under the scheme.  The Employment Tribunal, Employment Appeal Tribunal and, earlier this year, the Court of Appeal all found in the claimant's favour.  The employer was liable for the annual increments and their liability was not limited to the level of cover under the changed insurance policy.

When it came to the Tribunal looking at the documentation that governed the claimant's employment relationship it found a lack of consistency around the terms of the benefit.  The claimant had also not been made aware of some of the documentation that the employer sought to rely on.  Arguments made in an attempt to limit liability to the amount the insurance policy indemnified the employer for failed because of the unclear wording used in the contractual documentation. 

What can employers learn from this?

Employers need to take the opportunity to review the contractual documentation that is in place on a regular basis.  An obvious time to do so would be on promotion as other issues such as suitability of any post termination restrictions should also be considered at that time.  When documents such as handbooks are introduced or updated it should be checked that their terms (particularly any that have contractual effect) are aligned with other documentation. 

Wording intended to limit benefits that are provided under an insurance policy to the level of cover under that policy must be crystal clear.  Where the benefit is not intended to be contractual this should be stated.  Where relevant it should be stated that the benefit is subject to the terms of the policy as amended from time to time and confirmed that the level of cover may change or that the policy may be varied or withdrawn.  Employers should also specify that they are not liable for any benefits that the insurer fails to pay.  This would apply to other insurance backed benefits such as private health care, not just income protection schemes.  Historically there are a number of cases surrounding PHI benefits that were lost on termination of employment - the employer's ability to dismiss even if it means the employee loses the benefit should also be set out.

This case related only to liability for the 5% annual uplift, the cost would have been much more had the claim been for the full amount of the income protection.  Where there is ambiguity over contractual obligations, that ambiguity will be resolved in favour of an employee - it falls to every employer to ensure no such ambiguity arises in the first place.

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