Implied term outlawed dismissal of employee entitled to PHI benefits

The Employment Appeal Tribunal has ruled that an employer acted in breach of contract when it dismissed an employee while he was contractually entitled to long-term disability benefits (otherwise known as permanent health insurance or PHI benefits).

The claimant’s contract expressly conferred an entitlement to receive 2/3^rd of salary until death or retirement in the event of long-term sickness or injury. The EAT said that in these circumstances a term should be implied that he would not be dismissed on capability grounds once he became entitled to these long term disability benefits  

The dispute arose following the outsourcing of American Airlines’ security department to the respondent, ICTS UK Ltd. The TUPE transfer took effect in December 2012. By this time the claimant (Mr Awan) and another colleague (Mr Visram) were already on long-term sick leave. However ICTS was unable to obtain replacement PHI cover for those already on sick leave at the time of the transfer. Eventually it took the decision to dismiss both employees on capability grounds, and they brought separate proceedings in the employment tribunal.

In Mr Awan’s case the employment tribunal decided that the dismissal was fair and that there was no unlawful disability discrimination under section 15 of the Equality Act. This decision has now been overturned by the EAT, mainly because the tribunal had mistakenly thought that the employers were not in breach of contract when dismissing him on capability grounds, despite his contractual entitlement to PHI benefits. The case now returns to a new tribunal to make a fresh decision on both the issues in dispute, but this time taking into account the “highly relevant” fact that the employers had acted in breach of contract.

Meanwhile Mr Visram has also been involved in litigation with ICTS. In his case, based on very similar facts, the employment tribunal decided that he had been unfairly dismissed and that his dismissal also amounted to unlawful disability discrimination. The employers’ appeal against this decision was dismissed by the EAT in 2016. Last year, at a remedies hearing, the employment tribunal awarded Mr Visram compensation which included a payment for future loss of £12,900 a year, until such time as the disability benefits conferred by his contract of employment would have ended.

While the EAT’s rulings in this pair of cases about an implied term of this nature do not create new law, there have not been many appeal cases on this issue in recent years, and none, as far as we are aware, with similar facts.  There are two key learning points for employers:

• Review contractual terms in relation to PHI: This case illustrates the risks where there is a term in the contract of employment which confers an unqualified right to receive specified PHI benefits. The problem could have been avoided if the right had been qualified by reference to the availability of cover on reasonable terms, or if the entitlement had been contingent on payment having been received from the nominated insurers. Alternatively, the risk could have been mitigated if payment of claims under the policy had not been conditional on the recipient remaining in the insurer's employment.
• Assess PHI risks on a TUPE transfer: As happened in this case, a TUPE transfer can trigger a cessation of cover held by the transferor, leaving the transferee with an obligation to arrange replacement cover on comparable terms. Replacement cover can be difficult to find, particularly for claims that have already accrued prior to the transfer. Where the risk cannot be readily mitigated it would be wise for the incoming employer to seek indemnities from the transferor.