Dismissing an employee with permanent health insurance – is it a breach?

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Dismissing an employee with permanent health insurance – is it a breach?

If an employee is off on long term sick leave, benefitting from permanent health insurance, and the employer dismisses that employee resulting in a loss of those benefits, is this a breach of the implied term of trust and confidence?

Historically, case law suggested that it could be (Aspden v Webbs Poultry, QBD 1995). Where the reason for the dismissal is the incapacity, and the effect of the dismissal is to deprive the employee of the benefits that they otherwise would have received, this would in effect be to renege on the promise to provide the benefit in the first place. In other words, if an employee has a contractual right to a benefit if they are sick, but the employer is able to terminate the employee’s employment as soon as they are sick so that they do not get that benefit, what was the point in that benefit being offered in the first place?

The construction of the contract

Whether or not a dismissal will be a potential breach of the implied term of trust and confidence is determined by how the benefit is defined in the contract. Frustratingly, this is often not crystal clear. For example, there is a difference between a contract which is drafted in such a way as to put the obligation on an employer to provide insurance (where the benefit comes from the insurer) and one which places the obligation on the employer to provide a particular benefit (which the employer would be obliged to provide regardless of whether the insurer paid out).

This can get more difficult if there is an implied obligation not to dismiss, because of the obligation to provide PHI benefits, coupled with an express power to terminate the contract. This was the case in Reda v Flag (Privy Council (Bermuda) 2002), where it was held that the implied term not to breach trust and confidence could not override an express term which allowed the employer to terminate without cause.

The position has always been that the employer can terminate for a reason other than the absence, such as gross misconduct, even if this results in the loss of benefits. What can be more complicated is when the other reason is also linked to the fact that the employee is off-sick. However, in the case of Briscoe v Lubrizol Ltd (Court of Appeal, 2002), an employee on long term sick was dismissed and therefore lost out on their PHI benefit, because they failed to communicate with their employer in relation to the reasons for their absence. Whilst this was found to fall short of gross misconduct, it was nonetheless deemed to be a repudiatory breach of contract by the employee and the employer was accordingly entitled to dismiss, notwithstanding the loss of the benefit.

Case law developments

In the case of Lloyd v BCQ (2012), the EAT held “the lack of any prospect of a return to work would have amounted to good cause (to terminate) even if the effect of the dismissal would have been to deprive the employee of PHI benefits“. This case is in stark contrast to the type of arguments put forward in Aspden, and is the exact opposite to what was decided in Hill v General Accident Fire (1998), whereby the Court of Session ruled that the employee’s incapacity itself cannot amount to a good reason for dismissal where PHI benefits are at stake.

However, since Lloyd, recent case law would suggest that the tribunals are stepping back from the type of arguments put forward in Lloyd and instead reiterating those set out in Aspden. In Awan v ICTS UK Ltd (2018), the EAT found the justifications put forward in Lloyd to be unacceptable. In Awan, the EAT said that it would be contrary to the functioning of the long-term disability plan, and to its purpose, to permit the employer to exercise the contractual power to dismiss for the reason of the employee’s continuing incapacity so as to deny the employee the very benefits which the scheme envisages will be paid. This case came before the Court of Appeal in March 2019 and the appeal judgement is outstanding…

Practical guidance

The provision of benefits to your employees, such as PHI, can be a useful way to attract and retain talent. However, PHI is only one of a whole host of benefits that an employer could consider providing. Benefits such as discounted gym membership, subsidised parking, or enhanced holiday entitlement might be just as attractive to a prospective employee as PHI, but avoids the potential long-term implications of providing a benefit such as PHI.

If you do want to offer PHI to your employees, it is important to:

  • Ensure that the terms of any PHI benefit are clearly set out in the contract of employment;
  • Maintain the right to dismiss in the contract, noting that it is clear from the case law that such a term would have to be very explicit in order to be upheld by the court. Of course, a contractual right to dismiss does not guarantee that a tribunal would find such a dismissal fair. You would always need a fair reason and need to follow a fair process to avoid claims of unfair dismissal; and
  • Remember that you can still dismiss an employee for one of the 5 potentially fair reasons for dismissal (conduct, redundancy, capability, illegality or some other substantial reason), but it is important to be careful if you are dismissing for the reason of the incapacity itself (or something potentially linked to the incapacity) when PHI is provided.

If you would like any assistance relating to PHI or on employee benefits generally, please contact Claire, or our employment team.

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