A Snapshot Of Employee Benefits In The UK

Tuesday, July 1, 2008 - 00:00

Background

Many employees hired by UK-based employers receive generous benefits over and above their base pay. Whilst these benefits differ according to the seniority of the worker and the custom and practice of an industry, they are motivated by three main reasons:

• certain minimum benefits must be offered under domestic or European Union (EU) laws

• other additional benefits are regarded as an important recruitment and retention tool

• some benefits are tax advantageous to the employer, the employee or both.

Minimum Statutory Benefits

In addition to a minimum hourly rate of pay which is set annually by the government (currently £5.52 for most workers aged 22 and over, £4.60 for those aged between 18 and 21 and £3.53 for workers aged 16 and 17), employees have a statutory right to the following benefits:

Annual holiday entitlement

Workers have the right to a minimum of 4.8 weeks' paid annual leave (equivalent to 24 days for a full-time employee). This entitlement is due to increase to 5.6 weeks in April 2009. There is no statutory right to time off (paid or otherwise) on any public or bank holiday, of which there are eight a year in England and Wales. Whether a worker can be required to work on a public holiday is a matter for the contract and will often reflect industry norms. For example, the retail sector would typically see working on a public holiday as a necessity.

Pension provision

Employers with five or more employees must designate a private pension scheme to which employees can contribute. The employer need not contribute to the pension scheme on the employee's behalf. However, this is set to change under draft legislation requiring employers to contribute a minimum of 3% of the employee's salary into a private pension scheme. The anticipated start date for this change is 2012.

Family friendly benefits

There is a statutory framework for maternity, adoption, parental and paternity benefits, as well as related rights and remedies such as protection from termination. It sets a minimum floor for such benefits but many employers agree to more favourable contractual terms. Amongst these family friendly employee benefits are the following:

• Pregnant employees and new mothers receive time off for ante-natal appointments, up to 52 weeks' maternity leave and up to 39 weeks' statutory maternity pay (currently 90% of the employee's normal weekly earnings for the first 6 weeks and then £117.18 a week or 90% of normal weekly earnings if lower for up to 33 weeks). Similar pay and leave benefits are available to employees who are newly matched with a child for adoption by an adoption agency.

• Eligible employees are entitled to two weeks' paternity leave and pay following the birth or adoption of a child. Paternity pay is currently £117.18 a week or 90% of normal weekly earnings if lower. The government intends to increase paternity leave by an additional 26 weeks, some of which will be paid, with an anticipated start date of 2010.

• Unpaid parental leave, lasting up to 13 weeks, is available to birth and adoptive parents and also to anyone who has, or expects to have, parental responsibility for a child.

Sick pay

This is payable by employers to qualifying employees who are off sick for four or more days in a row, up to 28 weeks at a weekly rate of £75.40.

Additional Employee Benefits

UK employers routinely enhance the statutory provision of benefits with schemes ranging from gym membership to complex share and bonus arrangements. As in the USA, many UK employers have embraced the concept of flexible benefit schemes. Sometimes known as "cafeteria benefits" in the States, these schemes offer employees the option to select the benefits that suit them.

However, there are a number of employment law issues which must be considered when offering any enhanced employee benefits, flexible or otherwise. Some typical issues are discussed below.

Contractual or non-contractualbenefit?

Employers should decide at the outset whether employees will be granted a contractual right to a benefit, or whether it will be kept outside the contract of employment. A non-contractual benefit is easier to change or withdraw. However, a tension often arises in practice where the benefit also brings obligations for the employee. For example, an enhanced sick pay benefit may be accompanied by rules setting out what employees must do in order to be eligible for the benefit, such as maintaining contact and submitting to a medical check. Not making these rules contractual reduces the employer's power to enforce them.

One solution is to extract the rules from the benefit policy and incorporate them, but not the benefit, into the contract. Alternatively, some employers incorporate the benefit into the contract whilst adding flexibility and discretionary clauses to allow them to make later changes. However, such clauses are not always effective. Flexibility clauses are interpreted narrowly by the courts with any ambiguity being settled in favour of the employee. The more detrimental the change to the interests of the employee, the harder it will be to rely on the clause.

Discrimination risks

Employee benefits are susceptible to discrimination risks. For example, the triggering of a more favourable bonus or share benefit once the employee reaches a certain age is potentially age discriminatory.

A flexible benefits scheme that took account of the increased cost of offering benefits to older employees was recently under attack for age discrimination, although the employer's defence was successful in that case. Similarly, withdrawing insurance-based benefits, such as permanent health insurance and life assurance, due to the cost of cover beyond a certain age may be age discriminatory unless justified.

The calculation of benefits based on length of service may be subject to sex and age discrimination claims unless the practice can be justified, whilst denying benefits to part-time employees has also fallen foul of discrimination protection.

Finally, a number of equal pay claims feature bonus schemes, for example, where a woman receives an unjustifiably lower bonus than a man in the same job on the grounds of her sex, or where men and women work in different but equivalent jobs and the men receive a bonus, whilst the women do not.

Bonuses

The payment of bonuses is common both in areas where high performance is expected and for senior employees. Most employers try to avoid an express contractual requirement to pay a bonus by using a discretionary bonus scheme. However, employers do not have an unfettered right to exercise discretion in any way they see fit. Case law has confirmed that an employer has an implied obligation not to exercise its discretion perversely or irrationally. In addition, employers must ensure that bonuses do not become contractual over time through custom and practice.

Permanent health insurance (PHI)

It is increasingly common for employers to provide their employees with PHI during periods of long-term sickness or incapacity. Employers will normally provide these benefits by taking out an insurance policy with a third-party insurer.

Where a PHI clause is incorporated into the contract of employment, care must be taken to ensure that it reflects the policy itself. Employers have been found liable for PHI cover, even where the insurer has rejected the claim, where the contract wording was more beneficial than that provided under the policy.

In addition, employers must tread carefully when terminating the contract of an employee on ill-health grounds where there is a PHI clause. Where the PHI policy provides that benefits will only be paid in respect of employees who continue to be employed, the courts will imply a term into the contract to the effect that an employer will not terminate an employee's employment unless there is good cause or a lay-off (unless the contract clearly states that this is not what the parties intend).

Life Assurance

Life assurance is usually provided under an insurance policy, often as part of a pension scheme. However, some employers choose to "self-insure" the benefit.

As with PHI above, where the benefit is provided under an insurance policy, employers must ensure that the terms in the employment contract are not inconsistent with, or preferential to, the terms of the policy.

Medical insurance

Many employers now provide private medical insurance as a benefit as easy access to medical care can assist an employee's early return to work from sickness absence.

Cars

Company cars have long been used as an incentive in recruiting and retaining staff. The majority of large UK employers provide company cars, either for essential use or as a status reward or both. However, in 2002 their tax treatment changed and they are no longer so popular, with some employers offering a cash allowance or extra salary instead.

Due to the obvious financial and legal liabilities arising from company car use, employers should have detailed rules governing the employee's use of the car, their responsibilities and the payment of expenses.

Employee share schemes

Many UK-listed companies offer some form of share incentives to their employees to encourage long-term commitment to the company. Share plans are also offered by private companies although they are less commonly seen. They usually involve either the grant of share options, the purchase of shares, or the grant of a cash award calculated by reference to share price growth.

Some "approved" schemes enjoy valuable tax relief. However, due to their complex administration and tax treatment, employers are best advised to seek expert advice before introducing employee share schemes.

Enhanced pension provision

Most larger UK employers make contributions to their employees' pension scheme. Reflecting tax changes, high costs and stock market turbulence, the trend has been for employers to withdraw from their defined benefit (or final salary) pension schemes, replacing them with defined contribution (or money purchase) schemes to which they contribute a percentage of the employee's salary.

Martin Warren is Head of the Employment Law Practice of Eversheds LLP. He has particular expertise in dealing with strategic and reorganizational issues, trade union rights, consultation on redundancies and business transfers. He is located in the London office of Eversheds and can be reached at (44) 02920 47 7570.

Please email the author at martinwarren@eversheds.com for information about this article.