Employment Law Coffee Break: Industrial relations reforms, permanent health insurance, and our April HR pensions spotlight

Industrial relations reforms: three changes UK employers should not overlook

The Employment Rights Act (ERA) introduces wide-ranging reforms to the UK industrial relations landscape which risk being overshadowed by other high-profile reforms, including those on unfair dismissal, fire and rehire, and harassment.

Three key changes under the ERA are aimed at making it easier for unions to gain recognition in workplaces: the simplification of statutory recognition, new rights of access, and a duty to inform workers of their right to join. Union focus is also shifting from traditional industries such as manufacturing and engineering, to sectors such as retail, media and technology.

Businesses operating in these sectors (many of which have historically had limited exposure to union engagement) should take particular note of the industrial relations reforms introduced by the ERA. Associate director, Alex Farrell-Thomas, looks at the scope of these reforms and the proactive steps employers can take to prepare for them.

PHI payments can constitute 'wages' for the purposes of an unlawful deduction of wages claim following dismissal

The claimant went on long-term sick leave and, after 26 weeks, became contractually entitled to permanent health insurance (PHI) payments. Her employer had failed to put an insurance policy in place, so no payments were made. When her employer subsequently dismissed her while she remained off sick, both the Employment Tribunal and the Employment Appeal Tribunal rejected her argument that her entitlement to PHI payments should continue post-termination, taking the view that once employment ends, there can be no ongoing wages claim.

The Court of Session disagreed. A PHI obligation does not automatically fall away on dismissal; unlike ordinary pay, PHI does not require an employee to work and it can therefore run alongside the employment contract but independently of it. The court found that the dismissal itself may have been in breach of the implied term that an employer cannot dismiss an employee for the purpose of depriving them of a PHI benefit (in the absence of misconduct justifying dismissal); the dismissal would then have no legal effect and the PHI obligations continue as though the dismissal had never taken place.  

The court also found that the PHI payments themselves could constitute "wages" for the purposes of an unlawful deduction of wages claim, even where they arise after employment has ended.

What does this mean for employers?

This decision emphasises the importance of taking legal advice before dismissing an employee on long-term sick leave where an employee is eligible, or potentially eligible, for PHI benefits. The fact that the claimant here was able to pursue her claim as an unlawful deduction of wages claim in the tribunal meant that, unlike a contract claim the same forum, the amount she could claim was not capped.  

Employers should also review their contractual commitments (and the wording of any related policies in staff handbooks) to ensure that appropriate protection is in place should an insurance scheme not be established or fails to make the requisite payments. Express terms should be incorporated ensuring that any PHI entitlement is conditional on an insurer accepting the claim and that any entitlement to payments is limited to the amounts received from the insurer.

HR pensions spotlight: structuring the provision of death benefits in the workplace effectively

Employers who provide death benefits can offer valuable financial support to employees and their families. For these benefits to work as intended, employers need to make sure that their death in service schemes are structured effectively, that members understand both what the scheme provides and its limitations, and that those responsible for administering the scheme are ready to act swiftly and efficiently when the worst happens.

How well do you know your workplace death in service scheme?  

Take our short quiz to find out. 

1. Was your scheme set up just for your employer or your employer's group, or does your employer participate in a master trust managed by a professional trustee? If a master trust, go to question 9.

2. Where are the signed trust deed and rules for the scheme(s) kept and who has (and should have) access to them?

3. Is the scheme registered with HMRC? If so, is there documentary evidence of its registration (PSTR) number and who is the scheme administrator? And do the trustees of the scheme hold a group life assurance policy to provide the Scheme's benefits?

4. If the scheme is not registered with HMRC, do the trust deed and rules say that benefits are provided by an excepted group life policy? And do you have a copy of the current policy?

5. Who is the trustee of the scheme? Is the trustee the employer or an individual employee?  If an individual, do they still work for the employer or does the trustee need to be changed?

6. Do the benefits provided by the group life assurance policy (if it is an HMRC-registered scheme) or excepted group life policy (if it is not HMRC registered) match those promised to employees in their contracts of employment? And are any exclusions in the applicable policy consistent with those contracts?

7. Which employers are intended to participate in the scheme and from which date(s)? Are there formal documents to record their participation from those date(s) if required by the trust deed and rules?

8. Is there a process to ensure that the trustees, who are responsible for distributing the benefits when a death occurs, do so in accordance with their fiduciary duties and make any notifications required?

9. Is there a process which specifies who is responsible for notifying the trustees about a death and for making enquiries to collate the evidence they will need to decide how to distribute benefits in accordance with the scheme's rules?

10. Where are employee expressions of wish kept and who has access to them, taking into account the employer's data protection obligations?   

11. What information do you provide to employees about the scheme and the importance of keeping their expression of wish up to date? 

Registered scheme or excepted group life scheme?

If a scheme is registered, it will be subject to the same pensions tax rules as a registered pension scheme. This means that there is a limit (the lump sum and death benefit allowance, currently £1,073,100) on the total amount that can be paid in the form of tax-free lump sums to or in respect of a person during their lifetime or after their death. This cap would apply across all the employee's registered pension arrangements.  

Tax charges can also be triggered if a death benefit is paid out more than two years after the date the scheme administrator first knew of the member's death (or could reasonably have been expected to have known of it), or (rare in this context) where a member dies after age 75.

From 6 April 2027, some unused pension funds and pension scheme death benefits will also potentially be subject to inheritance tax on death. However, insured death in service lump sums will generally be out of scope, which is good news for registered death in service schemes.

If a scheme is an excepted group life scheme, there is no cap on the lump which can be paid tax free. To date these schemes have tended to be used for higher earners whose benefits may exceed the limit that applies to registered schemes. However, they are becoming more popular because that limit (which used to be the lifetime allowance, but is now the lump sum and death benefit allowance mentioned above) has been frozen for some time with the result that more employees risk being caught by it.

There are more restrictions on excepted group life policies, including on who can receive benefits from them, but these should not prevent employers from setting up a scheme or individuals from benefiting. There are also potential inheritance tax implications, in particular a 10-year anniversary charge, so it is generally recommended to wind up the scheme in good time before the tenth anniversary of its commencement date and to establish a new scheme.

If we can help by providing further information or training on any of the above issues, please contact pensions partner Claire Rankin or your usual Osborne Clarke contact.