Avoiding costly litigation when providing employee benefit schemes

A recent appeal case upheld a breach of contract claim over a lifetime rail travel benefit delivered by a third-party provider. We examine the case and how employers can avoid such disputes through clear terms and conditions for employee benefit schemes.

What was the case about?

The recent case of Adekoya v Heathrow Express Operating Co Ltd [2024] EAT 72 considered whether employers have an obligation to continue offering their employees benefits which are provided by a third-party provider, even when those benefits have been withdrawn by the third party. 

The case involved four former employees of Heathrow Express, a train service that operates between London Paddington and Heathrow Airport. The employees claimed that they were entitled to a lifetime travel benefit that allowed them and their dependents to travel at a heavily discounted rate on selected rail services – a benefit that they were entitled to retain if they were made redundant from the company after more than 5 years of service. 

The benefit was provided under a separate agreement between the company and a third party, the Rail Delivery Group (RDG). The agreement allowed for the travel benefit to be withdraw or reduced in certain circumstances. 

RDG took the decision to end the benefit for certain employees, including the claimants, in accordance with the agreement. Subsequently, the claimants, who all had more than 5 years’ service, were made redundant and were told that they would not be entitled to the benefit after termination of their employment. They brought a claim for breach of contract, seeking a declaration that they had a contractual right to the benefit and damages for its loss.

Although their employment contracts did not contain reference to the benefit, the claimants’ argued that the benefit was nevertheless incorporated into their employment contracts by means of a letter they received from the company outlining the terms and conditions of the benefit scheme that they were required to sign at the start of their employment. The employees knew the benefit was provided by a third party, but had not been provided with a copy of the separate agreement nor were its terms or the existence of the agreement itself referenced anywhere in the letter sent to the employees. In addition, the employees were not made aware that the benefit had been withdrawn.

The company denied that the benefit was contractual. In particular, the company argued that the letter was not part of the employment contract. They also contended that the cessation of the benefit was a decision made by the third party, over which they had no control or influence. and, in any event, that the terms and conditions contained a clause that allowed the benefit to be varied or withdrawn at any time.

The Tribunal initially rejected the claimant’s claim and found that both the letter outlining the benefit terms and conditions and the underlying agreement with the third party were incorporated into the employees’ contracts. As such, the benefit terms had been varied, so the employees were no longer entitled to the benefit post-termination. 

What did the Employment Appeal Tribunal decide?

The claimants’ appealed the decision, arguing that the Tribunal had made errors of law and fact in its judgment. The Employment Appeal Tribunal agreed that the benefit was incorporated into the employment contracts by reference to the letter. However, they determined that the underlying terms and conditions were not, and as such the company could not rely on the terms to withdraw the benefit nor could they have exercised any right to vary the provision of the benefit. Despite the employees being aware of the fact that the benefit was provided by a third party, this did not mean that the agreement had been incorporated into their employment contracts. Additionally, the employees had not agreed to vary their contracts and give up their contractual right to the travel benefit, by accepting the terms of their redundancy and terminating their employment.

What can employers learn from this case?

Employers who offer contractual benefits provided by third parties should be aware that they may be obligated to continue to offer these post-termination, notwithstanding termination of the underlying agreement between the employer and the third-party provider.

This case illustrates the importance of having clear terms and conditions for employee benefit schemes. Where contractual benefits are delivered with the support of a third-party provider, employers should:

• ensure there is unambiguous and express communication to employees of the limits of the employer's commitment to provide such benefits by reference to what has been agreed with the third-party provider;
• clearly state whether the continuation of any such benefits set out in or otherwise incorporated into contracts of employment are expressly subject to the terms of the agreement between the employer and the third-party provider, and provide employees with a copy of those terms;
• expressly state if benefits or associated documents form part of the employment contract and which do not;
• avoid using vague or ambiguous language that could create confusion or uncertainty – there should be clear permission to vary or withdraw a benefit without requiring employees’ consent;
• review and update their contractual terms and conditions regularly and communicate any changes to employees; and
• seek legal advice before withdrawing or changing any benefits that could be construed as contractual.

By taking these steps, employers can avoid disputes and claims arising from breach of contract and protect their interests and reputation.