Legal Q&A: Dealing with long-term sickness

By Pattie Walsh, partner, Richards Butler International

Q What are my liabilities on dismissing an employee on long-term sick
leave?

A A decision to dismiss an employee on long-term sick leave raises
the risk of possible claims under the Disability Discrimination Act or for
unfair dismissal.

There is also the complication of a possible breach of contract claim where
the employee is entitled to permanent health insurance (PHI) cover. This is
because the courts have implied a term into the employment contract that,
subject to limited exceptions, the employment must not be terminated if doing
so would deprive the employee of benefits under the PHI policy. Careful
drafting of the employment contract can minimise exposure.

Under the Employment Rights Act 1996, an employee who is incapable of work
through illness during the notice period is entitled to be paid normal pay for
each week of the statutory minimum notice period, even if all sick pay
entitlement has been exhausted.

However, section 87(4) of the Act somewhat oddly allows employers to avoid
the obligation to pay where the notice to be given by the employer to terminate
the contract is at least a week more than the statutory minimum notice period.

This was confirmed in Scotts Company (UK) Limited v Budd, where the contract
provided for three months’ notice, effectively one week more than the 12-week
statutory minimum. Even the presiding judge admitted this was a "curious
result".

Section 87(4) only applies if the contract itself provides for an extra
week’s notice. Simply giving a week’s more notice than the contractual
entitlement will not be sufficient.

In the extreme, you could consider making all contractual notice periods a
week in excess of the statutory minimum. However, bearing in mind that an
ill-health dismissal will occur relatively rarely, this option may not prove
viable on a cost benefit analysis.

One alternative is to catch the most costly cases by having a three month
notice period which applies once an employee has 12 years’ service, rather than
simply relying on the statutory maximum of 12 weeks.

Q Are there risks in providing permanent health insurance (PHI) cover?

A The main risk to the employee is that the insurance company refuses
to pay. This may occur because the employee does not meet the policy’s strict
incapacity criteria. The employee cannot force the insurance company to pay
because he or she is not a party to the insurance contract.

The case of Marlow v East Thames Housing Group in 2002 extended the implied
duty of trust and confidence to include a duty on employers to take reasonable
steps to procure benefits from the insurance company on behalf of the employee.

The main risk to the employer is having to provide the benefit out of its
own pocket. In the recent case of Jowitt v Pioneer, the staff handbook promised
ill-health cover according to criteria that were less strict than those spelled
out in the policy. As no reference was made to the policy in the contract or
the handbook, it was clear that it was not incorporated into the contract, and
the employer was bound by its own promises contained in its staff handbook.

This case highlights the importance of ensuring that any contractual terms
regarding PHI cover are made subject to the insurance policy, and that the
provision of benefit is expressed to be subject to payment by the insurer. The
contract should also provide sufficient flexibility to withdraw or alter the
benefit.

Q Are there any tax breaks available for ill-health dismissals?

A Yes. Tax and National Insurance contributions are not payable on
payments or other benefits provided in connection with the termination of
employment because of death, injury or disability of the employee. The payment
must not be part of general damages settling a claim on termination.

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