Charles Crow reviews the benefits and perils of Permanent Health Schemes in employment contracts

Wed, 12 Dec 2018

In the recent case of Awan v. ICTS UK Ltd [2018] 11WLUK 385 (Simler J, President) the EAT confirmed and strengthened previous decisions (Aspden v. Webbs Poultry [1996] IRLR 251, Briscoe v. Lubrizol Ltd [2002] IRLR 607, amongst others) to the effect that a term will be implied into contracts of employment 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”.  But is this apparently Claimant-friendly decision potentially a two-edged sword?

The facts

Mr Awan (hereinafter ‘C’) was a longstanding employee of American Airlines and had the benefit of permanent health benefits (a long-term disability benefit plan) in his contract of employment.  American Airlines had an insurance policy with Legal and General to cover payments made under that plan.  In October 2012, C went off sick with depression.  In December 2012, C’s employment was the subject of a TUPE transfer to ICTS (hereinafter ‘R’).   Accordingly, R inherited the liability for payments to C under the plan.  However, Legal and General refused to indemnify R (after a period of allowance as a ‘goodwill gesture’) and R was unable to secure similar cover in respect of employees already off sick (including C).  In November 2014, R dismissed C on account of there being no perceived likelihood of a return to work and an inability to agree any adjustments that might facilitate it.  C claimed unfair dismissal and s.15 disability discrimination.

Tribunal’s decision

The Tribunal found that there was no implied term preventing dismissal for incapacity whilst C was in receipt of benefits/payments under the plan, and in light of that amongst other considerations: the dismissal was fair, and was a proportionate means of achieving a legitimate aim.

EAT ruling

On appeal: the EAT referred to the case of Aspen in which the EAT held that an implied term restricting the employer’s ability to lawfully terminate the contract (i.e. without rendering it a wrongful dismissal) overrode an express term entitling the employer to dismiss for prolonged illness.  Simler J opined that employers who wished to reserve a right to dismissal for long-term incapacity despite the existence of such a scheme/plan "would need to use particularly clear words in their contracts to do so, and even then, may not succeed (as Aspden makes clear”.  On the facts here, the EAT found that there was an implied term as detailed in the opening paragraph above, despite the absence of any insurance cover, and found that the dismissal was therefore in breach of contract (wrongful).  It remitted the case for fresh consideration of whether the dismissal was nevertheless fair and/or justified for the purposes of s.15 Eq Act 2010, notwithstanding that the dismissal was wrongful – with the warning that the fact of dismissal in breach of contract, whilst not determinative of the issue under s.98(4) ERA 1996 (fairness), would be "very relevant indeed” (per Westminster City Council v. Cabaj [1996] ICR 960).

What it means

As was highlighted by the EAT, employers can (should?) seek ensure that the contract of employment limits the duty to pay the employee under the scheme to the extent to which the insurer indemnifies such payments, i.e. no insurance cover means no benefit/payment).  Furthermore, there is a clear warning to transferees to seek appropriate indemnities from transferors in TUPE situations.

Unintended consequences

The implications (potentially): quite rightly, the EAT warned that "terms should not be implied too readily, and that courts should tread warily in this area”.  Circumspection is appropriate given the limiting effect that such terms have on  the principle  of ‘freedom to contract’ and ability to terminate an employment relationship.  However, it appears that this implied term is here to stay.  Whilst on its face, this is a Claimant-friendly result: is there not a risk that it will encourage employers to cease offering such benefits altogether, or to start substituting the offer of such benefits with a notional increase in remuneration to cover the private acquisition of such benefit by the employee?  Even with an appropriate tying of the benefit to payment/indemnification by an insurer, employees will be prevented from dismissing their long-term absent employees who will ‘remain on the books’.  Any dismissal is almost certain, now, to be found to be wrongful (in breach of contract) and establishing the fairness of the dismissal and/or the justification defence of s.15 Eq Act 2010 may be fraught with litigation risk (and certainly expensive).  If, following such decisions, Permanent Health Schemes in employment contracts become increasingly a ‘thing of the past’, claimants will surely have won this battle, but lost the war.

Related articles

In R (on the application of Unison) v Lord Chancellor [2015] EWCA Civ 935, the Court of Appeal has r...

Date: Mon, 07 Sep 2015
In certain occupations, it is common for the employment contract to require the employee to sleep ov...

Date: Tue, 29 Sep 2015
How odd, you might think. A company can suffer a detriment under the Equality Act 2010 and so bring ...

Date: Wed, 07 Oct 2015