Removing Permanent Health Insurance at retirement age – EAT decision of Pelter v Buro Four Project Services Ltd (2022)

The Employment Appeal Tribunal (“EAT”) held that ceasing to provide permanent health insurance (“the PHI scheme”) to a Claimant after reaching the age of 65 was lawful.

In Pelter v Buro Four Project Services [2022] EAT 105, the EAT held that an employer ceasing to provide the benefit of access to the PHI scheme once the Claimant reached the age of 65 was lawful pursuant to paragraph 14 of schedule 9 of the Equality Act 2010 (“EqA”) and upheld the Employment Tribunal’s (“ET”) conclusion that the Claimant had not been subjected to direct age discrimination by the Respondent.

We at Farore Law are experts in all aspects of direct discrimination claims. Pelter is an interesting case as it considers whether an employer discriminated against an employee because of age when the employee’s PHI benefits ceased when he reached age 65.

Facts

The Claimant was born on 7 March 1955 and was a founding shareholder and director of Buro Four Project Services Ltd (“the Company” or “the Respondent”), which was incorporated in 1985. In 2003, the Claimant sold his shares in the Respondent and entered into a new Director’s Service Agreement (“DSA”). Under the terms of the DSA, the director’s retirement age was set at 60 and the DSA would terminate upon a director reaching the retirement age unless the Company exercised its absolute discretion to continue employing the director after the retirement age. The DSA went on to state that the retirement age would be varied in the event that it conflicted with any statutory or regulatory provision applicable to the Company.

The DSA made provision for PHI benefit under clause 8, which stated:

“8.2 The Company shall effect permanent health insurance (“PHI”) for the benefit of the Director upon such terms as shall provide for the payment to the Director throughout the period of his/her ill-health or disability with the exception of the first 26 consecutive weeks thereof of sums at a rate per annum equal to 75% of fixed annual salary on the date such absence commences less any state sickness benefits received by the Director provided always that such insurance is available at standard rates and subject also to the rules of such PHI Scheme and restrictions due to previous medical history.

8.3 The PHI will include the payment of employer pension contributions with the fixed annual salary being increased during a claim period at a rate per annum equal to the lower of RPI or 5% provided always that such enhancements are available at the standard rates and subject also to the rules of such PHI Scheme and restrictions due to previous medical history.”

The Respondent renewed its PHI with its insurers, which provided that “[o]nce a member is incapacitated, the terms and conditions of the policy immediately prior to his incapacity will continue to determine his benefit”. It also stated that “[t]erminal age means for each member the age at which they will cease to be a member”, which was set at the age of 65.

In April 2011, the Employment Equality (Repeal of Retirement Age Provisions) Regulations 2011 abolished the default retirement age of 65 years. The state pension age was later raised to 66 in January 2012.

On 3 July 2011, the Claimant commenced sick leave. On 2 September 2011, the Claimant informed the Respondent that he was not returning to work. The Respondent submitted a claim under the PHI policy for the payment of PHI benefits to the Claimant in November 2011.

The insurers rejected the claim for PHI benefits and the rejection was appealed on 26 January 2012. The appeal was dismissed by the insurers on 16 July 2012. The insurers subsequently accepted the Claimant’s claim for PHI benefits on 5 March 2013, in which the Claimant received benefits from that date, with the payments backdated so that the Respondents could recover sums it had paid to the Claimant pending the resolution of the PHI claim.

In 2016, the Respondent took out extended PHI cover with their insurers with cover provided until age 70. Two of their employees who were actively at work were provided with cover to age 70.  At some stage in 2017 or 2018, the Claimant was notified that his state pension age had risen to 66 and in April 2019 questioned when his PHI payments would cease.

On 30 June 2019, the Respondent gave the Claimant 18 months’ notice of termination of employment. On 7 August 2019, the Claimant commenced ACAS early conciliation against the Respondent and presented a claim for age discrimination on 13 August 2019. By 7 March 2020, the Claimant reached the age of 65 and stopped receiving PHI benefits. His employment with the Respondent terminated on 31 December 2020.

Legal Background

Under section 39(2)(a) and (b) EqA, an employer must not discriminate against an employee as to the terms of employment and in the way that the employer affords the employee access, or by not affording the employee access to “opportunities for promotion, transfer or training or for receiving any other benefit, facility or service”.

Section 13 EqA prohibits direct discrimination because of a protected characteristic. However, section 13(2) states that “[i]f the protected characteristic is age, A does not discriminate against B if A can show A’s treatment of B to be a proportionate means of achieving a legitimate aim.” This makes direct age discrimination unique, in that it is the only form of direct discrimination which may be potentially justified by the employer.

The justifications for direct age discrimination are narrowed to social policy objectives. As Lady Hale stated in Seldon v Clarkson Wright and Jakes [2012] UKSC 16 at paragraph 50, “the aims of the measure must be social policy objectives, such as those related to employment policy, the labour market or vocational training. These are of a public interest nature…”. Furthermore, the measures in question must be “both appropriate to achieve its legitimate aim or aims and necessary in order to do so”. Examples of legitimate aims which have been recognised by the CJEU in the context of direct age discrimination include:

·       Promoting access to employment for younger people;

·       Sharing out employment opportunities fairly between different generations;

·       Cushioning the blow for long-serving employees who may find it difficult to find new employment once dismissed; and

·       Facilitating the participation of older workers in the workforce.

In order to determine whether there has been less favourable treatment because of a protected characteristic, “there must be no material difference between the circumstances relating to each case” when advancing a comparator – see section 23(1) EqA 2010.

Of relevance to Pelter is a specific provision under the EqA which relates to the provision of insurance policy to employees. Paragraph 14 Schedule 9 EqA states:

“(1) It is not an age contravention for an employer to make arrangements for, or afford access to, the provision of insurance or a related financial service to or in respect of an employee for a period ending when the employee attains whichever is the greater of—

(a) the age of 65, and

(b) the state pensionable age.

[…]

(3) Sub-paragraphs (1) and (2) apply only where the insurance or related financial service is, or is to be, provided to the employer’s employees or a class of those employees—

(a) in pursuance of an arrangement between the employer and another person, or

(b) where the employer’s business includes the provision of insurance or financial services of the description in question, by the employer.”

ET decision

The ET held that although the PHI was available to all employees in a non-discriminatory away, the “terminal age” provision in the scheme was potentially discriminatory as the terminal age for the receipt of benefit was 65.

However, the ET concluded that the “terminal age” provision was permissible pursuant to paragraph 14(1) Schedule 9 EqA. It noted that “[a]t the time the scheme was entered into, the Claimant’s retirement age was 60 (under the terms of the DSA) and his state pension age was 65. The scheme, at that date therefore fell within the exception contained in paragraph 14(1) Schedule 9 of the Equality Act and did not amount to unlawful discrimination on grounds of age”.

The ET found that the access to the benefit of the PHI scheme ceased when the benefit was “triggered” (eg when the Claimant became permanently incapacitated from work). Accordingly, once the Claimant was eligible for payment of benefits by the insurer under the PHI scheme, there could be no ongoing requirement for the Respondent to provide PHI to the Claimant.

When the Claimant turned 65, the insurer stopped paying benefits under the terms of the PHI scheme in place at the date he became incapacitated from work. The ET held that the discriminatory act in this case was that of the insurer, not the Respondent.

The ET accepted the Respondent’s argument that it would have been impossible to transfer the Claimant to another scheme while he was claiming benefits, as he was a known liability and not a risk that any insurer could assess. In other words, it was not possible to obtain insurance in respect of an event which had already occurred.

The ET held that if the claimant had been subjected to age discrimination, the Respondent could seek to rely on paragraph 14 Schedule 9 EqA or establish that the terminal date was a proportionate means of achieving a legitimate aim for the purposes of section 13(2) EqA. The ET stated that, if paragraph 14 Schedule 9 did not apply, the discriminatory act would be justified as “paying a large sum out of the company’s income would affect the money available for bonus and other benefits to staff which would impact the fairness of distribution of benefits and competitiveness in the labour market. The financial position of the respondent has fluctuated but the liability to the claimant constitutes a considerable sum in the context of the finances of the respondent”.

The ET also concluded that the Claimant was out of time. It held that the act of the Respondent which gives rise to a discrimination claim was choosing the PHI scheme and it is therefore a single act with continuing consequences. The ET accepted that the Claimant would not have known there was a potential cause of action until he became aware that his state pension age was raised to 66. However, the ET held that it was not just and equitable to apply a time limit in excess of 3 months to permit the claim to proceed, as, among other things, the Claimant only started early conciliation on 7 August 2019 despite finding out about the changes to his state pension age in 2017 or 2018.

The Claimant appealed to the EAT.

EAT decision

HHJ Tayler observed that the purpose of paragraph 14 Schedule 9 is that it permits the provision of insurance by an employer for the benefit of employees, pursuant to which benefits terminates at the age of 65 or at state retirement age without the employer having to undergo the “rigours” of establishing a legitimate aim and showing that the limitation of the provision of benefits is a proportionate means of achieving a legitimate aim.

The EAT considered it clear that this was a case in which the Respondent agreed to provide the Claimant with access to the benefit of the PHI.  The nature of a PHI scheme is that the situation crystallises on the date that the employee becomes incapacitated for work so as to trigger the payment of benefits. Thereafter, the payment of benefits becomes a matter for the insurer, not the employer. After all, an employer cannot provide renewed insurance cover in respect of events which had already occurred.

During the period that the Respondent provided the Claimant with access to the benefit of the PHI scheme, it was lawful to provide employees with access to the benefit of a PHI scheme that would provide payments that ended at the age of 65. HHJ Tayler noted that the version of paragraph 14 Schedule 9 EqA in force at the time permitted benefits to cease at 65 but made no provision for a later state retirement age and, in any event, the Claimant’s state retirement age at the time was 65. Accordingly, the Respondent did not discriminate against the Claimant because of his age during the period it provided access to the benefit of the PHI scheme. It was the insurer, rather than the Respondent, that ceased payment when the Claimant reached 65 – this was a consequence of the terms of the PHI scheme crystallising on the date that the Claimant became incapacitated for work.

What to take away

This might be one of the few times that the EAT has had to consider paragraph 14 Schedule 9 EqA. Pelter is therefore a significant decision on the law of age discrimination in the provision of benefits.

An important point to take away from Pelter is the importance of being able to construe the terms of an insurance policy. Aside from the limitation point, a key reason why the age discrimination claim in Pelter was unsuccessful was the fact that the PHI scheme crystallised on the date on which the employee became incapacitated so as to trigger the payment of benefits, following which, the payment of benefits became a matter for the insurer, not the employer.

As a result, Pelter highlights the importance of the distinction between an employer agreeing to provide access to the benefit of PHI to its employees and an employer agreeing that it will fund sickness benefits to retirement, or some other age, should the employee become incapacitated, albeit potentially funded by insurance the employer has taken out for itself. In the former scenario (such as in Pelter), the payment of benefits was a matter for the insurer, not the employer.  As noted by the EAT in Hall v Xerox UK Ltd (2014) UKEAT/0061/14 at paragraph 23, an insurer in the former scenario cannot be regarded as an agent for the employer, as the role of the insurer is not to bring the employer “into relations with others, whether legal or otherwise. It was not expressly to fulfil any obligation of [the employer] to its own employees.” Although a contract between an employer and a PHI provider does have effects on employees, this is a very different matter from saying that the insurer was an agent of the employer.