The dangers of dismissing staff on permanent health insurance

Bradley Houlston and Rosie Kynman on how employers can avoid key risks involving employees with income protection schemes

Permanent health insurance (PHI) provides a replacement income for employees if they become unable to work through illness or injury. Typically, the benefit takes the form of a payment of around 50–75 per cent of an employee’s gross salary and is payable after a deferred period which often reflects the duration of any company sick pay to which the employee may be entitled. Payments usually remain payable until the employee no longer meets the definition of incapacity under the PHI policy, retires or their employment is otherwise terminated. 

PHI is a valuable benefit for employees and helps employers manage long-term sickness absence effectively, but employers need to be aware of various related employment law risks. In addition to statutory protections, for example, under discrimination legislation, the terms of the employee’s contract of employment are particularly crucial in this context. 

Implied contractual rights

A key condition of eligibility under most PHI schemes is that the employee must remain employed, even if they continue to be unable to work. It has long been established in case law that a court can imply into an employment contract a term that the employer will not terminate the employment so as to remove the employee’s entitlement under a PHI scheme, except where there has been gross misconduct justifying summary dismissal (other cases have clarified that employees who are in receipt of PHI can also be dismissed for a genuine redundancy). 

An employer that wishes to terminate employment for incapacity needs to bear this in mind, as breach of an implied term prohibiting the dismissal of a PHI recipient could result in an expensive breach of contract claim. However, a court will rarely imply a contractual term which is inconsistent with the express wording of the contract. Employers are therefore well advised to have wording in their employment contracts giving them the right to dismiss an employee who is receiving PHI benefits, even if that negates the employee’s cover. 

Such wording needs to be clear and precise. The recent case of Awan v ICTS UK Ltd is an example of an employer attempting unsuccessfully to rely on wording that was insufficiently clear. Mr Awan’s employment contract contained a power for the employer to dismiss on notice, as most contracts do. However, it did not include an explicit right to dismiss while in receipt of PHI. The EAT held that because the notice clause was in general terms and the contract did not expressly deal with incapacity, it did not override the implied clause protecting Mr Awan’s right to receive PHI. His dismissal was therefore in breach of contract.

Employers should consider reviewing contracts to ensure they contain a clear right to dismiss a PHI recipient. A well-drafted contract will also make clear that any PHI benefits are subject to the terms of the provider’s policy and that the employer’s obligation to continue payment ceases if the insurer refuses to pay out.

In addition to the contractual issues discussed above, employers will still need to be mindful of statutory unfair dismissal provisions and disability discrimination risks, particularly the duty to make reasonable adjustments under the Equality Act 2010. Employers should therefore undertake a fair process and give due consideration to reasonable adjustments, to minimise the risk of such claims.

Bradley Houlston is a senior associate and Rosie Kynman an associate in the employment and labour group at Bryan Cave Leighton Paisner