The Employment Appeal Tribunal (EAT) has recently confirmed that employers should take care when dismissing an employee who is entitled to participate in a permanent health insurance (PHI) scheme and is absent from work by reason of long term ill health. It held that there is an implied term that an employer will not dismiss an employee for incapacity if that would prevent the employee being entitled to long term disability benefits.

Where an employee is absent due to ill health then on termination of employment, the employer may face a claim for unfair dismissal and for disability discrimination.   Capability is a fair reason for dismissal, but the employer would have to show that it adopted a fair procedure in dismissing the employee, for example, by seeking medical advice and reviewing the likelihood of the employee returning to work.  A claim for disability discrimination can be defended by the employer if it can show that the dismissal was a proportionate means of achieving a legitimate aim and that the employer made all reasonable adjustments to ensure that the employee could return.  The situation becomes more complicated where the employer provides a PHI scheme.

In the case, the employee was employed as a security agent at Heathrow Airport by American Airlines. Under the terms of his contract of employment he was entitled to the benefit of an insured long term disability benefit plan.  The terms of the plan stated that the employee would be entitled to those benefits as long as he remained an employee and until he returned to work, death or retirement.    The employee went on long term sick leave and during that period the security department was outsourced and the employer’s obligations under the plan transferred to the new employer under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE).

The employee was dismissed by reason of lack of capability and he brought a claim for both unfair dismissal and disability discrimination. The Employment Tribunal held that the employer had dismissed the employee fairly and had acted reasonably.  It also held that the dismissal was a proportionate means of a achieving a legitimate aim and so there was no unlawful disability discrimination.

The employee appealed to the EAT and the appeal was upheld. It held that following a line of cases, a term should be implied into the contract that, once the employee has become entitled to payment of disability income under the long term disability plan,  the employer will not dismiss him on the grounds of continuing incapacity to work.  The term effectively limited the right of the employer to terminate on notice by preventing the exercise of that right in circumstances where it would frustrate the contractual entitlement to long term disability benefits.

As a result, the Employment Tribunal’s conclusions could not stand, and the EAT held that the matter should be remitted to a fresh tribunal to determine the fairness of the dismissal and whether it was a proportionate means of achieving a legitimate aim.

The case itself does not represent new law. In most cases it is the intention of the parties that the dismissal power will not be operated so as to remove accruing benefits under the income insurance scheme except cases of summary dismissal, redundancy, or a repudiatory breach by the employee.  For the most part employers will not be concerned by the individual remaining employed as the cost is covered by the insurance company.  However, in this case, the new provider,  following the TUPE transfer refused to cover the two individuals who were already on sick leave, of which the claimant was one.  Therefore, the employer would be responsible for covering the cost of the PHI.  Employers should therefore take care on a TUPE transfer to determine what cover can be sought  for employees on sick leave prior to the transfer.

Another issue for employers, who have employees on PHI schemes, is to remember that employees continue to accrue holiday during sick leave. Employers should therefore ensure effective absence management and include clauses limiting the carryover of the holiday for a certain period into the next holiday year.  For example, a clause should be included which states that any such carried over holiday accrued during a period of sickness absence which is not taken within eighteen months of the end of the relevant holiday year will be lost.  This means that when the employment is terminated, the employee will only be entitled to accrued holiday for a limited period of time.

Can an express term in the contract override the implied term regarding termination? It has generally been thought that an express termination clause allowing the employer the right to terminate for incapacity notwithstanding that the employee is on the PHI scheme would override the implied term.  However, the EAT in this case did cast some doubt explaining that such a clause would be inherently contradictory as either the claimant had a meaningful entitlement to disability benefits or the employer had an unfettered right to terminate his contract on notice even for incapacity.

As a result of the case it is clear that the contract should be drafted to ensure that the terms of the PHI in the contract are subject to the rules of the PHI scheme and the agreement of the insurance provider. It should also expressly state that the employer shall only be obliged to make payments to the employee if it has received payment from the insurance provider.  The employer should also retain the right to discontinue, vary or amend the scheme at any time on reasonable notice.   In addition, although the inclusion of an express clause allowing termination while absent on sick leave may be cast into doubt, it is worth including such a clause in case the employer may seek to rely on it.

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