Employment Law Coffee Break | GDPR for HR, drafting employment contracts and a round-up of recent developments

GDPR for HR: our latest update

Our latest GDPR for HR newsletter brings you a snapshot of developments, cases and insights relating to privacy in the workplace, including a recent Court of Appeal decision looking at accessing personal communications sent on work systems and potential reforms around Data Subject Access Requests.

To find out more about how our specialist GDPR employment team can support you and to sign up to future issues of our newsletter please contact partner Olivia Sinfield.  

Drafting contract provisions for the provision of benefits

Events such as the incapacity of an employee, dismissal or non-payment of a particular benefit can often give rise to legal issues, including disputes as to what has been agreed between employer and employee in the contract of employment. Many employers are also currently looking at what interim financial or other support they might provide to employees in light of the current cost of living crisis.  

Recent cases highlight the importance of ensuring that an employer's contractual terms accurately reflect their intentions and anticipates events such as employees' ill health and deal as far as possible with significant changes in the commercial landscape.  

Bonus provisions

A recent case in the Court of Session (Scotland) has highlighted the need to consider carefully the language used in bonus provisions and to pre-empt, so far as possible, the potential for the scheme to provide a more significant pay-out than that envisaged by the employer.

In brief, an account manager's bonus entitlement was greatly increased due to increased demand within her sales territory for particular medical equipment which could be adapted for Covid-19 during the pandemic, meaning sales were far higher than in previous periods. She was remunerated by way of salary and bonuses on sales achieved in her territory; if she achieved her annual sales target, all sales over a base figure (based on the previous year sales) would attract a total 5% bonus. With the impact of Covid-19 on the sale of products not having been foreseen, her employer sought a declaration that terms such as "sales", "achieved sales" and "sales target" within the bonus scheme should exclude the sale of products not in contemplation at October 2019 and that a reference to a "personal" sales target meant the scheme was only intended to reward the account manager's personal sales; not all those falling within her territory.

The court rejected the employer's proposition that the expression "achieved sales" and similar expressions are to be construed as restricting the account manager's bonus entitlement to circumstances in which their efforts have led directly to sale; "properly construed, the parties' agreement provides for a bonus entitlement calculated on an arithmetic basis. That was the way equivalent contracts had been operated in previous years. With the exception of the bonus target set by the sales director, each of the elements of the calculation was objectively derived from actual sales figures for the territory in question and required no judgement of the value or extent of the account manager's contribution… a contrary interpretation would lack commercial sense."

Further, there was nothing in the wording of the bonus scheme to support the employer's contentions that the scheme should exclude the sale of products not in contemplation at October 2019; "it made no commercial sense to construe the bonus agreement as providing for bonuses to be paid on sales of the equipment for uses developed before October 2019 but not for sales for uses developed after that date".

A term should not be implied into a detailed commercial contract "merely because it appeared fair or because the parties would have agreed it had it been suggested to them.. although the test was not one of 'absolute necessity' a term could only be implied if, without the term, the contract would lack commercial or practical coherence".

Anticipating every potential eventuality will inevitably be difficult, but employers can take steps in their bonus and commission schemes to mitigate against these so far as possible through careful drafting and giving careful thought to the rules of construction that a court will consider in the event of dispute. For example, should the scheme set out expressly what level of personal involvement is required for a sale to qualify for a bonus award, should only products/services in express contemplation at a specific date be included, should a maximum pay-out be set?

However, when putting terms in place it will always be important to remember the underlying purpose of the commission/bonus scheme from the company's perspective is to encourage sales and drive up business; a careful balance will need to be achieved in continuing to incentivise and retain staff in employment through incentive schemes, against concerns that individuals may be potentially over-rewarded in a particular scenario.

Where employers build in a discretionary element to cover unexpected or unforeseen circumstances, employers will also need to bear in mind that as well as their implied duty of trust and confidence to an employee, they must exercise their discretion honestly and in good faith and not in an arbitrary, capricious or irrational way.

Provision of PHI

Permanent health insurance (PHI) is another area where disputes often arise. It is essential that employers make clear that any incapacity benefit payable to an employee is subject to them being accepted onto the scheme by the insurer and meeting any eligibility criteria required by the insurer for receiving payments under the scheme. Where this is not made clear in the applicable contractual terms (usually the contract of employment), an employer making contractual provision for long-term incapacity payments to be made to employees no longer able to work, may find itself contractually obliged to make these payments regardless of whether any insurance policy is covering the cost – which could be a considerable expense up to the employee's point of retirement.

This has been recently highlighted by the Court of Appeal which found that an employer was contractually liable to continue to pay an employee income protection payments at a particular level where the employer had changed its insurance policy to one that did not provide the same level of cover to that contractually promised to the employee under their employment terms. It was found that the employer's contractual obligation was to procure the level of benefits as set out in the employee's contractual terms; express reference to limitations of the employer's liability would have been needed in order to limit their obligations to the reduced coverage under the new policy.

When correctly drafted, an employer's responsibility to an employee for incapacity benefits will be limited to the provision of access to the insurance scheme but the employee's eligibility to receive any payments under that scheme will be subject to them meeting the insurer's specified requirements and the employer will not be liable directly to the employee for any incapacity benefits. This principle was recently underlined by a decision in the Employment Appeal Tribunal which found that once the claimant was receiving payments under the PHI scheme funded by the insurer, it was the insurer rather than the employer that was responsible for the liabilities arising from, in this case, a claim of age discrimination.  

Also, an employer that dismisses an employee for incapacity before or during receipt of permanent health insurance benefits may find itself in breach of an implied term not to act in a way that deprives the employee of any permanent health insurance benefits, again leaving the employer to meet the costs of continuing incapacity payments.

Update on recent developments

We have reported in previous issues of the Coffee Break on the issues of menopause, legislative reform and giving oral evidence from overseas, about which there have been recent developments.