A recent ruling by the Long Term Insurance Ombudsman has highlighted the need to understand the terms and conditions that apply to fixed-term contractors not covered by group disability income policies.
In the case in point the employer had affected a group disability income policy of this nature which was intended to cover only permanent employees. However, unbeknown to the insurer, the employer paid over premiums under the policy in respect of fixed-term contractors as well. When one of the contractors became disabled the claim was declined by the insurer. Why? Because the policy specifically excluded contractors. Following a complaint from the contractor, the ombudsman upheld the insurer’s decision.
You may ask why there is a specific exclusion for contractors/fixed term employees, and this note will take you through the reasons, but let’s start at the beginning.
South African labour law recognises the need to treat all employees equally. With the changes taking place in the modern employment environment, where an increasing number of employees are employed temporarily or in terms of contracts, the legislator has found it necessary to develop the law to protect these workers. Part of this development included the introduction of the Labour Relations Amendment Act (LRAA). Now, regardless of the nature of their employment, whether permanent, fixed-term or temporary employers need to investigate the package of benefits, including employee benefits to which these employees are entitled.
One would think that Group benefits offered to permanent employees would be offered to fixed-term employees/ contractors as well – especially since these employees are potentially more vulnerable.
Who is a Fixed-Term Employee/Contractor?
LRAA Definition: Fixed term contracts serve a different purpose. According to the amendments to the LRAA which came into effect on 1 January 2015, a ‘fixed term contract’ is defined as “a contract of employment that terminates on:
a) The occurrence of a specified event;
b) The completion of a specified task or project; or
c) A fixed date other than an employee’s normal or agreed retirement.”
The changes have extended the definition of the ‘Employees’ to include:
a) Labour broker employees
b) Fixed term contractors
c) Part-time employees
Current Disability Offerings/Products
Income Protection Benefit
Provides disability claimants with reliable financial security when they are unable to work due to serious illness or injury by providing them with a monthly disability income benefit until the earliest of death, member returns to work and/or member reaches normal retirement age.
Temporary Income Protection
Provides disability claimants with reliable financial security when they are unable to work due to serious illness or injury by providing them with a monthly income benefit for a fixed period of time. One could interpret this as every claimant getting the fixed period payment. Cover would still cease if for example NRA is reached before the expiry of the fixed term. My suggestion would be to rather state that a maximum number of payments would be made under this product.
Lump Sum Disability
Pays out a once-off lump sum amount when it has been established that a member has become totally and permanently disabled.
So why do insurers not cover Fixed-Term Employees/Contractors?
The principal of fixed term employees/contractors is that, unlike a permanent employee whose contract only expires at retirement age, their contracts terminate at a specified time in the future, other than their normal or agreed retirement dates.
The intention of disability insurance is to insure your income in the event that you become unable to earn an income, due to medical reasons, for a prolonged period of time. This is intended to replace the income you would have otherwise expected to earn.
Let’s look at this practically. Themba is a fixed term contractor for employer ABC. The contract is for a period of 6 months. During this time she becomes disabled. If she was on the group disability income policy, and she submitted a valid claim this would then pay out a benefit from now until normal retirement age. However, she was only employed for 6 months, so she would benefit from an income for life – rather say NRA. This would not be equitable.
With this in mind, here are some of the reasons why contractors are not covered:
Firstly, the purpose of disability insurance is indemnity, not profit, and having a monthly pay out for a period longer than your expected period of employment would result in a “profit”.
Secondly, there is a high risk of anti-selection. This is due to the fact that if a member had cover for a period that was longer than the expected employment period, there would be an incentive to submit a claim.
So what should employers do?
Employers will need to check the terms of their employment contracts and their employer owned insurance policies. The fact that the employer is paying a premium in respect of a contractor or fixed-term employee does not mean that the employee is covered. The onus is on the employer to ensure that premiums are not paid on behalf of employees who are ineligible in terms of the policy conditions.
There are certain disability type policies that could be put in place for contractors. It is important to discuss these with your consultant and/or insurer to establish what these options are. It is also important to communicate with staff so that they clearly understand what benefits they have in place.
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