Many employers provide their employees with income protection insurance (also known as permanent health insurance or PHI) as a standard benefit without realising the potential consequences for them. It is common for employers to assume that their obligations extend no further than ensuring that the premiums are paid, however this is not the case. Disputes concerning Income Protection are becoming more frequent (possibly because insurance companies are becoming less willing to pay benefits following claims). It is therefore important for employers to be aware of the areas likely to be most at issue.
A fundamental term of many Income Protection schemes is that the employee remains in employment in order to qualify for income protection under the policy. Accordingly, if the employment ceases the employee will no longer be covered and the benefit will stop (or will never commence). Case law has therefore established an implied term that the employer cannot terminate the employment relationship, and so defeat an employee’s Income Protection claim, except in certain circumstances.
In Aspden v Webbs Poultry & Meat Group (Holdings) Limited (a High Court case) the judge held that even though the employee’s contract expressly provided for dismissal for prolonged incapacity, there was an implied contractual term (in circumstances where the claimant’s entitlement to benefit under the employer’s Income Protection scheme was dependent on continuous employment) to the effect that, except where there was gross misconduct justifying summary dismissal, the employer would not terminate the contract while the employee was incapacitated for work and was receiving Income Protection benefits.
Subsequent case law has sought to make clear that Aspden did not necessarily have far-reaching ramifications and that the case was to a large extent confined to its facts. For example, in Lloyd v BCQ the Employment Appeals Tribunal held that the existence of the employer’s express right to terminate in circumstances of incapacity meant that there was no implied term to the contrary. Other cases (in which employers have been able to dismiss employees claiming Income Protection benefits fairly) have involved either gross misconduct or redundancy. However, employers still need to exercise caution as each case will be decided on its own specific facts.
What is clear is that an employer cannot dismiss an employee solely as a means of removing their entitlement to benefits under a Income Protection scheme (Briscoe v Lubrizol (a Court of Appeal case)).
It is also worth noting that in light of the Stringer litigation if a worker remains on the employers books while claiming benefits under an Income Protection scheme such workers will be entitled to request to take paid holiday for each year of their continued employment. Furthermore, on termination they will be entitled to a payment in lieu of any accrued but untaken holiday, which could prove very costly for the employer.
Practical considerations: dismissals and Income Protection schemes
When dealing with Income Protection schemes, a number of options are available to employers:
1. Seek to override any implied term by reserving an express right to terminate employment even if this disentitles the employee from claiming under the scheme. Given that this would be contrary to the purpose of having the Income Protection scheme in the first place, the term would need to be very explicit in order to be upheld.
2. If possible, agree in the contract with the Income Protection insurer that, once an employee has become eligible for Income Protection benefits, they do not need to remain on the employer’s books in order to continue to be entitled to receive Income Protection benefits. Refer to this in the employee’s contract of employment. Schemes are increasingly being drafted in this way, which avoids issues around holiday accrual as highlighted above.
3. State that if the employee is refused cover by the Income Protection insurer and refused again on appeal, then the employer’s implied duty is discharged and it is not obliged to retain the employee thereafter. Expressly exclude any duty to litigate on the employee’s behalf.
4. Ensure that the employee’s contract of employment does not give any greater right to Income Protection benefits than those provided in the current insurance policy.
5. Provide for (in the relevant clauses) that an employer only has to pay Income Protection benefits to an employee if it has received correlating sums from the policy provider.
6. Consider whether to expressly exclude liability to any employee for any failure or refusal of the policy provider to provide benefits under the scheme, or if the Income Protection provider sets conditions or limitations on the benefits.