It is not against the law if it is set up properly.
Typically the best way to set this up is to have the employer set up a medical reimbursement plan (sometimes called a Health Reimbursement Arrangement or HRA).
This way everyone gets to enjoy the cheaper prices of individual health insurance instead of a group plan, everyone gets to pick and choose the plan and company that they want, and the employer still gets to help pay (and receive the corresponding tax deduction).
Here is more information on how medical reimbursement plans work:
http://www.healthquote360.com/Group_Hea ... _Plans.php