News & Insights

Contract is King

Ian Machray explores ambiguity in contractual obligations.

In a recent case the Employment Appeal Tribunal (EAT) found that an employee was entitled to “escalator” payments under an income protection policy that were agreed with the original employer (E1), even though those payments were not covered by their new employer’s (E2) income protection insurance policy. The employee joined E1 in 2003 but transferred to E2 three years later. The EAT found that E2 was bound to make these payments, as the summary of benefits, including the escalator payments, were part of the original contractual obligations and they had never agreed a contractual change with the employee.

The employee originally received an offer letter, a summary of benefits and a contract of service in 2003 from E1. The offer letter and the summary of benefits included a reference to an “escalator” payment of 5% per annum in the event of long-term sickness absence. At the time this additional payment was covered by E1’s insurance. E1 was then acquired by E2 in 2006. E2 gave a presentation to all employees on the implication for benefit provisions in 2007. The employee also signed a letter in the same year confirming his wishes to participate in E2’s income protection scheme. In 2009 the employee began a period of long-term sickness absence. In 2016 E2 informed him that the escalator has not and will not be applied as it has ceased to be part of the company’s income protection scheme in 2008.

The employee made a claim to the Employment Tribunal (ET) for unlawful deduction from wages in 2018 claiming the value of the additional escalator payments. The ET found in favour of the employee finding that the offer letter, the summary of benefits and the contract indicated a contractual entitlement to the escalator payment. E2 appealed.

The EAT dismissed the appeal. When looking at previous case law the EAT pointed out that if there is any ambiguity or uncertainty as to whether E2’s obligation to provide benefits is to be limited by reference to the specific terms of their insurance cover, this will be resolved in favour of the employee.

Additionally, the EAT noted that a reference alone to the fact that E2 arranged insurance in respect of the benefit was not sufficient to limit the commitment by reference to the terms of that policy. To be effective, the limitation of E2’s exposure must be unambiguously and expressly communicated to the employee, so that there can be no doubt about it.

Importantly, the EAT also confirmed that the summary of benefits had contractual effect as the language used was language of entitlement (with no element of discretion or ability to amend the benefits from time to time). The entitlement to escalator payments was repeated, unambiguous and a headline term appearing in the offer letter and therefore it was intended that it would be incorporated as a contractual term.

The decision shows how important it is to clearly set out any contractual terms in an appropriate format and make sure the wording comprehensively covers all eventualities, particularly when it comes to terms with financial significance. It would have been easy to allow the employer flexibility within the contractual documents to amend the benefit offered.  Further, if E2 had consulted and agreed in writing any change in benefits at the relevant time when the insurance was changed the outcome could have been different. This case is also a good reminder for transferee employers in a TUPE scenario to carefully check the terms of permanent health insurance benefits provided by a transferor to any of the transferring employees.