Most GIP policies will provide cover until retirement or a return to work, whichever is sooner, often at 50% or 75% of then current salary. Almost all potential legal problems can easily be avoided by appropriate contractual drafting.
Avoiding costly errors in group risk provision
The most costly error that employers can make is to refer to benefits in contracts or handbooks, without stating that the benefit is subject to restrictions in the ‘small print’ of the insurance company, and is subject to acceptance or maintenance of the claim by the insurer.
Courts have decided that this can create an obligation to maintain the replacement salary or insured benefit at the employer’s cost, even when the insurer has refused or discontinued cover. This mostly happens in the context of GIP claims when the insurer deems that the employee has recovered, while the employee and his or her GP disagree.
The contract should make it clear that any insured benefit is provided strictly under the conditions of the policy in place from time to time, and that if cover is refused or discontinued by the insurer, the employer will not be required to provide or continue those benefits.
Many GIP policies require that in order to benefit, the employee must remain ‘on the books’, notwithstanding an anticipated long absence. In the case of Aspden v Webbs Poultry, it was decided that the requirement for the employee to remain in employment to benefit created an implied duty on the employer not to dismiss an employee if that would prevent him from benefiting from the insured scheme.
This same principle would probably apply to all insured benefits that have as a condition the individual’s continued employment. The principle would also suggest that an employer may well also be prevented from dismissing an employee who might be able to apply for the benefit at some point in the future, even though that point has not yet been reached.
It is easily dealt with by drafting an appropriate contractual clause. Most employers will state expressly that they reserve the right to dismiss an employee for long-term ill health, even if that will disentitle the employee from accessing GIP benefits. In order to protect staff, many employers now seek from their insurer confirmation that cover will continue to be provided, even if the employee is dismissed for long-term ill health, or for some other reason.
Since the case of Pereda v Madrid Movilidad, many employers have spotted that employees in GIP schemes may be running up very considerable holiday benefits, which may need to be paid off by the employer at the end of the employment. It makes sense to include in the contract of employment a term that GIP benefits will be set off against holiday entitlement. Many employers now pay a topped-up payment of full pay for 28 days in each year of absence, in order to potentially exhaust holiday entitlement for that year, partially subsidised by the insurer.
How to counter rising costs of group risk
Increasing premia can make the benefit unaffordable, so how easy is it to modify or even remove insured benefits? An appropriate contractual term, which makes clear that benefits may be modified or discontinued, should make such a change relatively easy to implement. Without it, employers will need to seek consensual variation, and ultimately may need to serve notice to terminate existing contracts, and offer a replacement contract that does not include the benefit.
This can result in a stand-off, and potentially the employer may need to dismiss employees who refuse to accept the change, although experience shows that relatively few employees will hold out, and refuse to accept a new contract. This is a complex process requiring expert legal or HR advice. It is a great deal easier to introduce such changes if some new level of benefit, albeit often a cheaper one, is being offered as an alternative to the benefit that is being removed.
Jim Lister is principal lawyer, employment, at Slater and Gordon
