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Although it is becoming less common, many employers still offer generous insurance benefits to employees that provide financial assistance should they become unable to carry out their role due to long-term sickness or disability. Such permanent health insurance policies allow the employee to recover the benefits payable provided that the employee meets the often strict criteria imposed by the insurer. Such schemes are clearly of great value to affected employees: as long as the employee remains unable to work (as defined in the terms of the individual policy), benefits may continue up to normal retirement age. This can potentially be many years. Most of these policies will require the employee to remain in employment in order to get the benefit of the PHI policy.

Employers who have such schemes in place for their employees have, however, discovered that these can have unintended consequences, and can potentially give rise to significant challenges when trying to dismiss employees who are in receipt of benefits under such policies. A number of cases have held that there can be an implied contractual term in the contract of employment that the employer will not dismiss an employee who is receiving the benefit of a PHI policy, and that to do so could be a breach of contract. The key argument is that to allow an employer to dismiss an employee who is in receipt of such ill-health related benefits for incapacity would defeat the clear purpose of such schemes by denying the employee the benefit the scheme envisages will be paid. On the other hand, such an implied term appears to fly in the face of the express an unrestricted contractual right to dismiss an employee on notice.

Even if there is no breach of contract, dismissal in such circumstances may still be unfair, depending upon whether the employer had properly considered the issue of entitlement under such a scheme. In addition, such a dismissal may also be discriminatory (if the employee has disability status) as the courts have also held that dismissing an employee who is receiving the benefit of a PHI policy may amount to discrimination arising from disability.

The recent case of Awan v ICTS UK Limited illustrates the potential consequences for employers who have such schemes in place and do not properly apply their minds to a) the wording of the entitlement in the contract of employment and b) the employee’s entitlement under the PHI policy when considering dismissal.

The Awan case involved an employee who had been on long-term sick leave suffering from depression. His contract of employment entitled him to benefits under his employer’s group income protection insurance where he was prevented by illness or injury from performing his own occupation as a security agent with American Airlines so long as he remained employed. When American Airlines outsourced the provision of security services and Mr Awan’s employment transferred to the new provider of the security services, his new employer instigated a capability process. They investigated whether any adjustments could be made to facilitate Mr Awan’s return to work, but when it became clear that this was not possible, the decision was made to terminate his employment. His new employer made reference to the fact that he had been absent for over two years, that there was no prospect of him returning within a reasonable period of time, and that his absence was causing them operational difficulties. They did not consider his contractual entitlement to income protection insurance when reaching their decision. Mr Anwan raised a number of claims, stating that his dismissal had been unfair, and that his dismissal was an act of unlawful discrimination because of something arising out of disability.

At first instance, the Employment Tribunal decided that, although ICTS UK Limited was contractually obliged to pay Mr Awan the long-terms disability benefits while he remained employed, that there was no implied term in his contract of employment which restricted his employer’s right to dismiss him for capability while he was entitled to receive such benefits, that his employer acted reasonably when dismissing him, and that the dismissal was a proportionate means of achieving a legitimate aim, meaning there was no disability discrimination.

The Employment Appeal Tribunal (EAT) disagreed. It found that the whole purpose of having income protection schemes would be defeated if employers could simply dismiss on grounds of capability whenever an employee became unfit. It took into account that the power to dismiss was expressed in general terms in the contract and did not expressly reserve the right to dismiss where the income protection benefit had become payable. Given that the right to receive the insurance cover was expressly stated in the contract and was not limited, for example, by the rules of the scheme, the EAT held that there was an implied term in the contract that “once the employee has become entitled to payment of disability income due under the long-term disability plan, the employer will not dismiss him on the grounds of his continuing incapacity to work”.

Although the breach of this term did not necessarily make Mr Awan’s dismissal unfair, it was a factor that should have been considered, both in relation to the fairness of the dismissal, and in relation to whether the discrimination arising from disability was a proportionate means of achieving a legitimate aim. These issues were therefore sent back to the Employment Tribunal for fresh consideration.

This case illustrates that there is a significant danger that employers who offer such generous incapacity benefits (or who, as here, inherit them following a TUPE transfer) may end up with employees on their books who have not been at work for prolonged periods, have no reasonable prospects of returning to work in the near future, but who they may not be able to dismiss fairly.

The EAT in the Awan spent some time on interpreting both the wording of the PHI clause and the clause giving the employer the right to terminate. It noted that the disability benefit clause stated that once payable it would continue until death, retirement, or return to work. No reference was made to dismissal for incapacity. The termination clause also did not expressly deal with the right to terminate for incapacity or its interaction with the disability benefit clause. Dealing with these issues in the contract, giving the employer a right to dismiss for incapacity despite the existence of the benefit, may have been sufficient to override breach of contract arguments. However, this would not necessarily defeat arguments of disability discrimination.

We would recommend that employers who offer PHI benefits, or indeed any other insurance benefit, will want to ensure that the contractual entitlement is subject to the rules of the individual schemes, and, crucially, to relevant payment being made by the insurer. The EAT specifically noted the failure to make Mr Awan’s entitlement subject to such conditions.

If there are employees on PHI cover that employers are considering dismissing, it is important to consider what the potential risks are, and if in doubt, seek advice before dismissing the individual, to avoid exposure to breach of contract, unfair dismissal, and disability discrimination claims.

If you have any queries regarding PHI benefits or any of the issues discussed above, please contact a member of the Stronachs Employment Team.

Annika Neukirch, Solicitor

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