Employer in breach of contract for dismissing an employee for capability while he was in receipt of PHI benefits

IFRS 16 and its impact on EBITDA/debt and financial covenants

In the case of Awan v ICTS UK Ltd the Employment Appeal Tribunal (“EAT”) has decided that the employer’s decision to dismiss an employee for capability while he was in receipt of benefits under a PHI scheme was a breach of an implied term of that employee’s contract. Although this did not, of itself, automatically render the dismissal unfair, the EAT said that the breach was ‘very relevant indeed’ to determining whether there had been an unfair dismissal.

Background

Mr Awan was originally employed by American Airlines and had worked for them for some time. In October 2012 he was certified as unfit to work. Once he had exhausted his right to sick pay under his contract he was placed on American Airline’s PHI scheme which was funded under an insurance policy with Legal & General.  Mr Awan’s contract very clearly stated that, under the PHI scheme, he was entitled to receive two-thirds of his salary until he returned to work, retired, or died.  The contract did not make any reference to the underlying insurance policy or state that payments to Mr Awan were dependent on payment being made by the insurer.  Although the contract contained a general right of dismissal it did not state that this right would apply regardless of whether dismissal would end Mr Awan’s ongoing right to receive benefits under the PHI Scheme.

In December 2012 Mr Awan’s employment transferred to ICTS UK Ltd (“ICTS”) under TUPE. However Legal & General refused to make the payments on the basis that Mr Awan was no longer employed by American Airlines. ICTS’s insurer, Canada Life, refused to make payments in respect of employees who were already on sick leave at the time of the transfer.  Interim arrangements were put in place between ICTS and the insurers while attempts were made to resolve this issue. These arrangements expired in September 2014.

A capability meeting was held in November 2014 which established that Mr Awan could not give an indication of when he would be able to return to work. Following this meeting, Mr Awan was dismissed by ICTS on the basis of capability. The effect of his dismissal was that payments under the PHI scheme came to an end.

Tribunal Proceedings

Mr Awan brought proceedings in the Employment Tribunal (“ET”) claiming that, because the effect of his dismissal was to end his entitlement to receive benefits under the PHI Scheme, the decision to dismiss him for capability was unfair.

The ET rejected this claim and found that there was no implied term in Mr Awan’s contract preventing ICTS from dismissing him for capability while he was in receipt of benefits under the PHI scheme.  

Mr Awan appealed to the EAT.

EAT’s decision

The EAT overturned the ET’s decision and found that in order for the contract between the parties to work, there was an implied term in Mr Awan’s contract that ICTS would not dismiss him for capability while he was in receipt of benefits under the PHI scheme.  If this term was not implied then it would defeat the whole purpose of the PHI scheme.

Mr Awan’s contract was clear that he was entitled to payment of his salary, not, as ICTS sought to argue, to insurance cover alone and there was nothing to state that payment of his salary was contingent on ICTS being able to obtain cover or the insurer paying out under the policy.  

The EAT also said that dismissal in breach of contract is not necessarily unfair but whether there has been such a breach is ‘very relevant indeed’ when a Tribunal is assessing whether an employer acted reasonably in dismissing an employee.

The claim was remitted to a fresh ET to decide if Mr Awan’s dismissal was fair in light of ICTS’s breach of contract and the other circumstances surrounding the case.

Comment

This case was based on some rather unsophisticated old wording regarding PHI in the employee’s contract. Many modern contracts which contain an entitlement to receive PHI set out that any right an employee may have to receive payments under a PHI scheme will not preclude the employer from dismissing him/ her for capability. Employers should be aware, however, that even such explicit drafting may not be effective. 

Employers can take some comfort from the fact that case law has established that they can, in some circumstances, dismiss employees in receipt of PHI benefits for reasons other than capability, for example gross misconduct or, potentially, redundancy.

Employers should ensure that their employment contracts make it clear that employees’ entitlement in respect of PHI is not to payments for salary but to the benefit of an insurance policy, subject to the terms of that policy. It should also be clear that any payments under the scheme will only be made to the employee if the insurer pays. Although this will not prevent a dismissal for capability being in breach of contract and potentially unfair, it may help if an employer finds themselves, as ICTS did, without an insurer willing to fund payments to an employee.  

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