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Employee Benefits and TUPE

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    This article considers the effect of TUPE on certain insured employee benefits. For further information please speak to your usual contact at Ashurst or Howden.

    The Transfer of Undertakings (Protection of Employment) Regulations ("TUPE") protects employees where their employing business changes hands. Broadly TUPE transfers all rights, powers, duties and liabilities under or in connection with a contract of employment to a transferee employer except for criminal liabilities and certain pension rights. Effectively, the employment contracts of in-scope employees, who do not object to the transfer, will automatically transfer to the transferee employer on their existing employment terms.

    What does TUPE mean for employee benefits?

    The transferee employer will usually need to continue to provide any contractual rights to benefits from an insurance scheme, such as private healthcare, life assurance and income protection.

    The starting position is that any changes to the contractual terms of the transferred employee's employment are void if the sole or principal reason for the change is the transfer itself. Subject to an ‘ETO’ reason exception (where changes to the workforce are for an economic, technical or organisational reason) this 'lock-in' to an employee's terms and conditions can apply for some time after the transfer as the test is whether the change has been caused mainly by the transfer.

    What happens if the new employer cannot match existing benefits?

    In many cases the transferee employer will be able to amend existing insurance arrangements to accommodate inclusion of a new group on a different design, but there may be circumstances where this is not possible, or desirable.

    Where the transferee employer cannot match an existing benefit, they will look to rely on a pre-existing power to vary or withdraw the benefit in any contractual arrangement.

    Alternatively, the employer may have a discretion on the extent of the cover, and under TUPE this power of discretion would transfer to the transferee employer. The transferee employer may be able to use this discretion to change benefits but this should be done with care. Further, a discretionary benefit may have become contractual through the transferor employer's custom and practice.

    Tricky issues may also arise around flexible benefits schemes where an employee's right to participate in the scheme may transfer to the new employer, even if the employee did not actually participate.

    Employer's risk appetite

    Where a transferee employer cannot match employee benefits and the contractual and discretionary routes are not appropriate, there are risk-based approaches open to the employer. For example, transferred employees may be offered inducements to agree to give up an insured benefit, in the hope that employees are less likely to bring claims. Depending on the circumstances, this approach combined with the employees' consent to the change may amount to an ETO reason under TUPE.

    However, courts and tribunals will be cautious about permitting such changes. Additionally even if proposed changes to an employee's insurance schemes are allowed under TUPE, the transferee employer must provide the transferor employer with written confirmation of its proposed changes before the transfer takes place, so that the transferring employees' representatives can be informed.

    The withdrawal of an employee's contractual right to participate in a benefit may give rise to a breach of contract claim, or an unlawful deduction from wages claim. There is also a risk that an employee may claim constructive unfair dismissal or even establish that such a dismissal is connected with the TUPE transfer and automatically unfair.

    Can an insurer refuse cover for a transferred employee?

    Although employees' rights to a contractual benefit from an insurance scheme automatically transfer, it is less clear what happens to the insurance contract. The transferee employer may need to renegotiate the insurance policy, provide a new one on no less favourable terms or simply become the policyholder on the existing arrangement. However, where employees are transferring out of an existing arrangement, the existing insurer is under no obligation to set up a new arrangement. Where the new employer includes the transferring employees in any existing arrangements, or sets up a new arrangement, the insurer will decide the cover terms.

    Case law suggests that TUPE applies to transfer the right of indemnity under an insurance scheme to the transferee. However, this is a relatively untested area of law and specific advice should be taken.

    What about employees who are already ill or have a condition?

    Any individuals in poor health should be declared to the insurer, and this may impact any terms offered when establishing a new arrangement or being included in an existing arrangement. In addition, someone who is already off work due to illness cannot be covered under a new income protection arrangement until they return to work, and there may be insurer conditions on other policies, such as a requirement to be “actively at work”.

    Income protection benefits are fixed at the day an individual's absence commenced, so it will be for the transferor employer to make a claim under their existing policy, as an absent employee cannot be insured under any new arrangement.

    In a TUPE situation, income protection cover may cease at the effective date of transfer where an individual's service with the policyholder (i.e. the transferor employer) is terminated before a claim is admitted, or the employee is in a deferred period. They may be eligible for their new employer's income protection arrangement (where this exists) if they satisfy the insurer's "actively at work" policy provision.

    In terms of the insurance arrangement the position is uncertain but generally the insurer will not wish to see an employee disadvantaged as a result of a TUPE transfer. Subject to agreement from the ceding employer, often the insurer will process the claim and make payments if admitted. However, the ceding employer's agreement should be documented in any sale and purchase agreement.

    Where an employee has completed the deferred period but the claim has not yet been admitted the claim will usually be processed under the original arrangement.

    Regardless of when an individual started receiving eligible private medical treatment, membership of an existing private healthcare policy will ordinarily cease at date of transfer, unless the arrangement is also being transferred. It then becomes the responsibility of the transferee employer to ensure employees can continue to be covered for ongoing treatments within their own or new policy. The transferee employer should ensure that the insurer will accept the incoming population on a ‘No Further Underwriting’ basis, meaning employees can continue to receive treatment for pre-existing conditions or the diagnosis and treatment of current symptoms in accordance with the terms and conditions of the policy.

    What happens with existing (or potential) group income protection claims or claims under group private medical insurance policies?

    Existing income protection claims will remain a claim under the transferor employer’s policy. With the written consent of the transferor employer, the insurer may pay future benefit payments to the transferee employer in respect of a claim. Any necessary insurance documentation should be completed before the transfer. Pending income protection claims can also be treated in the same way.

    For private medical insurance, it is important that there is continuity of cover, as at any moment in time a significant proportion of the eligible workforce are likely to be undergoing treatment. Claims for treatment prior to date of transfer would continue to be authorised and paid by the transferor employer’s insurer. All claims for treatment which take place on or after date of transfer should be submitted to the provider of the transferee employer’s private healthcare policy.

    If an in-scope employee is receiving (or waiting to receive) insured benefits and they are unable to make a claim under their former employer's insured benefit scheme, then the transferee employer may have to make those payments in certain situations according to recent case law. Potential transferee employers should conduct appropriate due diligence around employees who are in receipt of (or are waiting to receive) long-term ill health benefits and the level of insurance benefits provided by the transferor employer.

    Any sale or purchase involving the transfer of employees is complex and not only should appropriate legal advice be sought, but the benefit implications also need to be considered to ensure that the transferee employee does not unwittingly find themselves with liabilities that they are not protected against.

    Howdens contacts

    Matthew Gregson
    Executive Director
    Howden Employee Benefits & Wellbeing
    M: +44 7923 233843

    Paul White
    Head of Technical
    Howden Employee Benefits & Wellbeing
    M: +44 7827 943818


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