Disability benefits clauses require skillful drafting

The recent case of Awan v ICTS UK Limited carries a warning to employers who offer generous employee benefits such as long-term sick pay and disability benefits because they could be a doubled edged sword when put to the test. My colleague Alex deals with the caselaw later in this article. But first, Iet’s talk about why disability benefits can be dangerous if they haven’t been thought through and what steps you can take to ensure your employment contracts don’t fail you or your staff.

Employers may offer generous benefits in order to attract the best staff or just because they like to do the right thing. However, when a client (lets call them Midco Limited) had a regional sales executive go on long term sick leave a few years ago I remember his illness prevented him from working and naturally he sought to rely on what he believed was long term disability benefit enshrined in his employment contract. Sadly, things didn’t work out as he or his employer had expected.

Beware linking disability benefit to employment

It was a bright November morning, when Jenny called me from Midco’s HR department to ask for advice. She explained the background which involved long term sickness absence and said HR had written the usual letters, with the employee’s permission, to doctors and consultants in an attempt to determine the prognosis for a return to work and in this case the responses were decisive. I heard the uncharacteristic anxiety in her voice as she told me the medical experts were in agreement, saying the salesman’s illness qualified as a serious disability and he was unlikely to return to work in the foreseeable future. Jenny described how during the employee’s absence, sales revenue had dropped like a stone in his territory and after months of going with the flow the Board of Directors had an empathy failure and decided HR should terminate the employee’s contract and hire a replacement.

While this was an Aha! moment for the board of directors it sent Jenny and her HR colleagues into a spin. Why? Well the reason HR were wringing their hands was because they knew the claim for disability benefits insurance was dependent on employment and that if they fired the employee, the insurance company would refuse to pay out. This would result in the ridiculous position where the employee qualified for long term disability benefits due to being too ill to work but was sacked from his employment because he was too ill to work. This makes a mockery of the contractual term to pay him a living wage if he becomes incapacitated.

Damages flowing from breach of disability benefit term

HR knew only too well that this would be a case of giving with one hand and taking away with the other. As their lawyers, we weighed in with some simple logic pointing out that the decision to terminate the contract would be in breach of the disability benefit clause and that would have the domino effect of causing the employee hardship and/or expense which otherwise he would not have suffered and that the employer would be held responsible for damages.

We suggested we should discuss an alternative solution, but before HR had time to get the biscuits out, news that the company was being taken over by ‘the Americans’ reached Midco’s London office. Seasoned legal advisors will tell you that American employers don’t as a rule have a lot of time for English employment tribunals and prefer to sack first and pay later. That is their prerogative of course because it isn’t a crime to sack someone but basically this development was a game changer and it fell to me to get on the phone and explain the legal position to a stunned American Sales Director from Wisconsin. I will add that we didn’t draft the contract in this case it was inherited from a TUPE transfer.

Better arrangements for incapacitated employees & their employers

Where does that leave you?  Alex deals with the solution to the termination principle in the following part of this article but there is another element to be dealt with first. During the sick leave period (before the termination) which can go on for many months the employee could still be entitled to bonuses and commissions arising out of their territory which puts the employer in a difficult position. This can arise where the contract doesn’t limit the benefits or even worse gives the sales person exclusive rights to work the territory. It will soon dawn on everyone that hiring a substitute isn’t a panacea to the problem in hand.

Now I am not suggesting that contractual terms can solve all your problems nor that the law is good at managing grey areas but there are steps you can take to limit your company’s exposure. Be realistic about the terms you are offering and consider alternative solutions; such as paying key employees sufficient for them to take out personal insurance against disability and incapacity which isn’t linked to continuing employment.

If you have made overly-generous promises or failed to lock down the contractual terms of territorial sales staff perhaps it’s time to ask your legal advisors to re-draft your employment contracts, toute suite! Now for Alex’s caselaw…

The caselaw – by Alex Greaves

Dismissal while entitled to disability benefits is breach of implied term

The Employment Appeal Tribunal recently held in Awan v ICTS UK Limited that an employee’s dismissal while he was entitled to long-term disability benefits was in breach of an implied term.

The employee, in this case, had a contract, which provided that he was entitled to six months full sick pay and if still on sick leave after that time, would benefit from a long-term disability benefit plan which would pay two-thirds of his base annual salary (less any State disability benefits) until the earlier of his return to work, retirement or death. The contract also contained a clause entitling his employer to dismiss on notice.

Group income protection policy for long term disability benefits

The employer had a group income protection policy covering the provision of the long-term disability benefits to its employees. The policy provided that the insured member would be entitled to benefits under the policy only so long as that person remained in employment.

While he was off sick his employment was TUPE transferred. The new employer used a new insurer to provide the long-term disability cover to the employees transferred to it. However, the new insurer refused to accept liability for employees who were already on sick leave when the policy commenced. The original insurer also refused to provide benefits to the employee because its contract was with the original employer and at the time that the employee became eligible to claim under the policy, he was no longer employed by that company.

The new insurer took the view that the original one had an obligation to continue making the payments. However, it agreed that it would, on a without prejudice basis and without admission of liability, make equivalent monthly payments until the situation was clarified.

Termination for incapability

Following a subsequent capability meeting, the employee’s employment terminated for capability reasons as the employer was of the view that there was no prospect of him returning to work (he had by then been off for 2 years) within a defined or a reasonable period of time.

The employee then brought claims arguing that his dismissal while he was entitled to long-term disability benefits was unfair and discrimination arising from disability.

Implied versus express terms

The tribunal found that the new employer was contractually obliged to pay long-term disability benefits while he remained employed. However, it said, that there was no implied term in his contract preventing the employer from dismissing him for incapability while he was entitled to receive such benefits. It reasoned that there was an express term in the contract that allowed the employer to terminate the contract on notice and an implied term cannot contradict or restrict an express term of a contract. The tribunal also said that the employer acted reasonably in dismissing him for incapacity so his dismissal was fair. Further, it said, the dismissal was a proportionate means of achieving a legitimate aim so there was no unlawful discrimination arising from disability.

Employment Appeal Tribunal holds employer in breach

Allowing a subsequent appeal, the Employment Appeal Tribunal said that in dismissing the employee, the employer had acted in breach of an implied term of the contract. The issues of whether the dismissal were unfair and discrimination arising from disability were remitted to the tribunal.

It said that the employee had a contractual entitlement to be paid two-thirds of his salary after 26 weeks of sick leave. His contract did not refer to an insurance policy or state that his entitlement to disability benefits was dependent on the rules of an insurance policy or the rules of a particular insurance provider. It said that the obligation on the employer to pay benefits under the disability plan was regardless of whether the insurer paid out under the policy or not.

It said that whole purpose of a disability benefit scheme would be defeated if an employer could end entitlement under the schemes by dismissing employees when they became unfit for work. However, whether an employer had a right to do so was, it said, a matter of the construction of the particular contract in question.

The express power to terminate in this employee’s contract was in general terms. It did not expressly deal with incapacity and it did not expressly reserve the right to dismiss without cause. There was also an express term providing that the employee was entitled to disability benefits after 26 weeks sick leave until he returned to work, retired or died. That clause did not provide for dismissal on incapacity. If the employer were free to dismiss under the termination clause, his unequivocal entitlement under the disability benefits clause would be deprived of its content. The disability benefit clause would in effect be re-written to provide that his disability benefits would be paid until he returned to work, retired, died or were dismissed for incapacity.

A triumph for logic

The Employment Appeal Tribunal concluded that on a proper construction of the contract, it was contrary to the functioning and purpose of the long-term disability plan to permit the employer to exercise the contractual power to dismiss and deny the employee the benefits that the disability benefits clause envisaged would be paid.

Case reference: Awan v ICTS UK Limited full judgment.

In practice ~ do’s and don’ts

Dismissal while entitled to disability benefits was in breach of implied term

The Employment Appeal Tribunal has held that, in a case where an employee had a contractual entitlement to long-term disability benefits, his dismissal was in breach of an implied term.

What does this mean?

It would be risky for an employer to seek to rely on an express contractual right to terminate for incapacity where the contract also provides the employee with the contractual right to disability benefits or permanent health insurance.

What should employers do?

Employers wishing to provide such benefits should ensure that the actual insurance policy is incorporated into the contract by reference, so that the employer is not exposed if the insurer pays out less or nothing at all under the policy.  Any significant limitations under the policy should be specifically drawn to the employee’s attention to ensure they are incorporated into the contract. Any termination clause should specifically include the right to terminate for incapacity notwithstanding the benefits clause, although this may not be enforceable following earlier case law.