Employee benefits; pitfalls to avoid

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They may not all be as attractive as they seem

Employee recruitment and retention remains challenging for employers and offering an attractive package of benefits can give employers an edge. A wide range of benefits can be offered, including buying or selling annual leave; reduced gym membership; private medical insurance; critical illness insurance, income protection insurance and retail discounts or vouchers.

Employers need to take care with employee benefits as the rules around different benefits can be complex, and there are often unanticipated knock-on effects.

This article outlines the key pitfalls to be aware of and explores the Government’s cycle to work scheme, by way of a practical example.

Benefits of little value

Although it may seem obvious, employers need to make sure that what they offer remains valuable to their particular workforce.

Employees looking to reduce their travel costs in response to spiraling costs of living and to reduce their environmental impact, may now be interested in the cycle to work schemes. But a reduction on the cost of family dental insurance is unlikely to be seen as a perk if most employees are young and have no children.

Staff surveys can be used to gauge the attractiveness of a range of benefits.

Creating a contractual right to a benefit

Staff benefit schemes do not always work out well, or the provider may change the terms which make them less attractive or affordable.

Employers wishing to have the flexibility to withdraw a benefit need to ensure that it is not included in the employment contract and it is made clear that it is discretionary and could be withdrawn. However, this may not be enough to stop it being a contractual entitlement if it is consistently provided and there is an expectation that it will be provided year after year.

It may not be realistic to keep particularly valuable benefits out of the contract. Employees may see these as an important component of their remuneration package and expect a contractual commitment that they will be provided.

Equal pay risks

Where the range of contractual benefits has varied over time, some employees may have a more generous package than others. Differences between the contractual benefits of male and female employees, can create the risk of an equal pay claim.

We can advise you on minimising the risk of an equal pay claim if you wish to offer benefits to some but not all employees or to stop offering a benefit to new joiners.

Discrimination risks

Aside from equal pay risks, employers must take care not to discriminate against employees with a particular characteristic. For example, it would be discriminatory to give one week’s honeymoon leave to a female employee marrying a man, but not to give this to a female employee marrying or entering a civil partnership with a woman. It should however be noted that there is a legal exemption in respect of group risk insured benefits (for example life insurance cover, income protection, sickness and accident insurance and private medical cover). The exemption allows employers who offer or provide these benefits to their employees to discriminate on the grounds of age by stopping providing the benefits once employees reach the age of 65 (or state pension age if higher).

Bear in mind that employees may perceive that certain arrangements are benefits, such as being given a client hospitality budget which could lead to bringing in new business and, in turn, to promotion opportunities.

Withdrawing a benefit in breach of contract

If the benefit is not a contractual entitlement, it should be possible to withdraw the benefit. Depending on the nature of the benefit, this may have to be done on a phased basis to tie in with current commitments. It is good practice to give plenty of prior warning.

Where employees have a contractual entitlement to the benefit, employers need to follow the usual procedures for changing the employment contract. We can advise you on how to minimise risk when changing a contract of employment. Care also needs to be taken that a contractual right to withdraw a benefit does not breach a separate agreement with the employee or have tax implications HMRC gives guidance on this.

If the benefit relates to a pension scheme, this may trigger consultation obligations.

Focus on the cycle to work scheme

By way of a specific example, the loan of bikes and e-bikes is available through the Government’s cycle to work scheme. The employee pays monthly instalments under a hire agreement. The instalments are ‘sacrificed’ from gross salary, meaning the employee pays less tax and National Insurance (NI). This reduces the overall cost to the employee and employers save on employer NI contributions.

Five key areas to care with:

  • Pitfall #1 – bike ownership

Avoid agreeing with the employee that they will automatically own the bike at the end of the hire agreement or risk losing the benefit of the tax exemption. HMRC provides guidance on calculating the value of the bike at the end of the agreement for sale to the employee.

  • Pitfall #2 – scheme criteria and compliance

Employees do not have to commit to using the bike to commute to work every day, but 50 per cent of its use should be for getting to work. Although the scheme has to be offered to the whole workforce, this could rule out employees who work mostly from home. Another limitation is that an employee’s monthly pay cannot go below the level of the National Minimum Wage or National Living Wage once the salary sacrifice has been made. This means some lower-paid workers cannot use the scheme.

  • Pitfall #3 – impact on other benefits

As HMRC guidance explains, salary sacrifice can affect entitlement to statutory payments, such as statutory sick pay. Employees should be made aware of this.

Salary sacrifice schemes can also affect earnings-related payments such as overtime and employer pension contributions. It needs to be clear to the employee whether these payments will be based on their actual reduced salary or the notional, pre-sacrifice salary. This should be recorded in the contract of employment.

  • Pitfall #4 – tax implications

Most benefits are taxable as benefits in kind. However, some are particularly valuable because they are exempt from tax and National Insurance (NI) contributions, such as payments into pension schemes and salary sacrifice to ‘buy’ extra annual leave. To avoid HMRC asking for tax and NI on these schemes, make sure you meet the conditions for the exemptions. For all salary sacrifice schemes, HMRC guidance requires that this includes ensuring that changes to the employee’s contract are made before the first payment under the new arrangement. If a bike is sold to an employee at the end of the hire agreement, tax, NI and VAT may be payable.

  • Pitfall #5 – leaving arrangements

The hire agreement should address what happens if the employee leaves their job before the end of the hire agreement. This could be to compensate for any outstanding instalments. Make sure that the amendments to the contract allow you to lawfully make deductions from the final salary payment to recover these costs. It should be made clear that the tax exemption is not available.

There are different ways to deal with the impact of family leave on salary sacrifice schemes.

How we can help

For further information on how we can help your business with employment law, please contact the employment team on 01733 882800 or email [email protected].

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