Case update (2): Contracts of employment – Long-term disability benefits

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Summary:  Is there an implied term that an employer will not dismiss an employee for incapability if that would frustrate entitlement to long-term disability benefits?

Yes, on the facts, held the EAT in Awan v ICTS available here.

Facts:  Mr Awan, the employee, commenced employment with American Airlines, the employer, as a security agent at Heathrow Airport. Mr Awan’s employment contract entitled him to the benefit of an insured long term disability benefit plan. The terms of the plan stated that benefits would terminate in the event the employee was no longer in employment.

Mr Awan suffered from depression and took sick leave. He received contractual sick pay, and subsequently long-term disability payments. After his sick leave had started, American Airlines outsourced its security functions. As a result, Mr Awan’s employment (along with his employer’s obligations associated with his entitlement to long-term disability benefits) transferred to ICTS under TUPE.

Mr Awan remained off sick following the TUPE transfer and was eventually dismissed by ICTS by reason of capability. ICTS had concluded that he was permanently incapable of performing his role. At the time of his dismissal, Mr Awan was in receipt of long-term disability payments (although there had been some negotiations with the relevant insurers, given the TUPE transfer, and the employer was funding some of the payments).

Mr Awan brought Tribunal claims, arguing that it was unfair and discriminatory to dismiss him whilst he was still entitled to long-term disability payments.

Whilst Mr Awan was a disabled person for the purposes of the Equality Act 2010, the tribunal found that ICTS had acted reasonably in dismissing him by reason of capability and that his dismissal was a proportionate means of achieving a legitimate aim (meaning that there was no unlawful discrimination). The Tribunal rejected Mr Awan’s argument that there was an implied term in his employment contract restricting his employer’s ability to dismiss him when he was entitled to long-term disability payments.

Mr Awan appealed to the EAT.

The EAT disagreed with the Tribunal. On a proper construction of the contract, a term should be implied that “once the employee has become entitled to payment of disability income due under the long-term disability plan, the employer will not dismiss him on the grounds of his continuing incapacity to work.” That term operated to limit the express contractual right to terminate on notice if it would frustrate the contractual entitlement to long term disability benefits.

As to unfair dismissal, dismissal in breach of contract is not necessarily unfair. But here the contractual position was, according to the EAT, ‘very relevant indeed’ as part of the circumstances against which the reasonableness of the employer’s actions were to be judged. Crucially, the EAT found that the whole purpose of the disability benefit scheme would be defeated if Mr Awan’s employer could end entitlement under the scheme by dismissing him when he became unfit for work.

Therefore the Tribunal’s conclusion that the employee’s dismissal was fair, and that it was a proportionate means of achieving a legitimate aim, could not stand. These questions were remitted to a fresh Tribunal for reconsideration.

Implications: This decision is important for employers who provide long-term disability benefits (such as those provided under a permanent health insurance scheme) to their employees. Employers should tread extremely carefully before dismissing any employee who is, or may be, entitled to benefits under such scheme.

Whilst the EAT accepted that terms should not be implied too readily, terms will be implied where appropriate. The EAT noted that Mr Awan’s employment contract (like employment contracts for other employees) was known to both parties to include the benefit of a disability insurance plan. This benefit could only work if employees entitled to receive these benefits, such as Mr Awan, remained in employment for the duration of their incapacity. Mr Awan’s employment contract would be contradictory if it also provided for his employer to exercise a broad contractual power to dismiss him in order to deprive him of the benefits to which he was contractually entitled.

Employers should ensure that their contracts of employment:

  • refer to the relevant insurance policy by name where appropriate, to limit exposure if the insurer pays out less or nothing at all under the relevant policy;
  • make it clear that refusal of cover by an insurer will discharge any duty the employer may have to pay under the scheme; and
  • specifically include the right to terminate for incapacity notwithstanding any contractual entitlement to long-term disability benefits. However, such a termination provision may not be enforceable in practice in the light of the EAT’s decision in Mr Awan’s case.