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Dismissing sick employees who have Permanent Health Insurance (PHI)
Pure Employment Law > News > Dismissing sick employees who have Permanent Health Insurance (PHI)

Dismissing sick employees who have Permanent Health Insurance (PHI)

27 November 2012 by Nicola Brown

Can an employer lawfully dismiss an employee on the grounds of ill health, when the employee is entitled to the benefit of permanent health insurance (PHI)?  Potentially yes, according to the Employment Appeal Tribunal (EAT) in Lloyd v BCQ Limited (2012).

PHI is insurance cover that will provide an employee with replacement income if they cannot work because of illness or injury for an extended period of time.

Ill health has always been a potentially fair reason for dismissal.  However, where an employee has the benefit of PHI provided by the employer, the situation is more complicated.  In Aspden v Webbs Poultry and Meat (Holdings) Limited (1996), the High Court held that dismissing an employee while they are in receipt of PHI benefits could entitle the employee to claim damages for breach of contract for being wrongfully deprived of the benefits under the policy. This does seem logical, because nearly all PHI insurers require the employee to remain employed in order to benefit from the policy. Therefore, if the employer dismisses the employee because they are sick and unable to work, they would be depriving them of the benefit of the PHI cover – which was the whole reason for taking out the cover in the first place!  It should be noted that Aspden does not prevent an employer from dismissing an employee who has PHI cover for other reasons, for example gross misconduct.

So what changed in the Lloyd case?  Mr Lloyd was employed by BCQ Ltd from 1978 as a Works Director and was on the board of directors.  In May 2007 he suffered a back injury and, following two periods of sick absence in July and August, went off on long-term sick leave until his dismissal for ill-health on 31 May 2011.  From 1988 BCQ provided PHI for Mr Lloyd, although there was no reference to this in his contract of employment.

In 1992 he signed an employment contract which contained an entire agreement clause which stated that:

"[this Agreement] contains the entire agreement between the parties and supersedes all previous Agreements and arrangements (if any) relating to the employment of the Employee by the Company (which shall be deemed to have been terminated by mutual consent.)"

The contract also contained a clause expressly stating that the company could terminate Mr Lloyd’s contact in the event of prolonged ill health absence.

When it became clear in 2010 that Mr Lloyd would not return to work, BCQ negotiated a settlement with the PHI insurers to accept a cash sum of £38,000 in return for cancelling the PHI policy.  Mr Lloyd had not been made aware of these negotiations, and the sum was paid to the company, rather than to Mr Lloyd.  The £38,000 was the equivalent of the benefit Mr Lloyd would have received had he remained in the PHI scheme until his 60th birthday, which was when the entitlement would have lapsed in any event.  The money was subsequently paid to Mr Lloyd when he was dismissed.

Mr Lloyd brought various claims in the Employment Tribunal, including claims of unfair dismissal and disability discrimination. He also brought a claim for breach of contract in relation to the PHI. He argued that, following the Aspden authority, there was an implied term that his employment would not be terminated whilst he was receiving PHI benefits where the effect of the dismissal would be to deprive him of the PHI benefits.

The EAT upheld the Employment Tribunal’s decision that Mr Lloyd had not been unfairly dismissed or discriminated against.  On the breach of contract point, they said that as there was an entire agreement clause in Mr Lloyd’s contract, there was no contractual right to the PHI cover, so the withdrawal of it could not be a breach of contract.  Further, they said that the provision in the contract providing for the termination of his employment in the event of his long term ill health absence meant that there could be no implied right to say that the employment could not be terminated due to ill health.  They went on to say that, even if there had been a breach of contract, Mr Lloyd had not suffered any loss as he had been paid what he would have received under the PHI policy, and that there was no legal obligation on BCQ to tell Mr Lloyd about their negotiations with the PHI insurers.  That is certainly right, but had they done so, they might have avoided this litigation!

This case shows that careful drafting of contracts of employment can make all the difference – and that is particularly so where the employee is being offered the benefit of PHI.

If you would like us to review your contracts of employment, or draft them from scratch, please contact any member of the Pure Employment Law team (01243 836840 or enquiries@pureemploymentlaw.co.uk).

Please note that this update is not intended to be exhaustive or be a substitute for legal advice. The application of the law in this area will often depend upon the specific facts and you are advised to seek specific advice on any given scenario.