141: Employees should not be dismissed for incapacity whilst they are contractually entitled to long-term disability benefits

The recent Employment Appeal Tribunal (EAT) decision in Awan v ICTS UK Ltd confirms that an employer should not dismiss an employee for incapacity where they have a contractual entitlement to long-term disability benefits or permanent health insurance (PHI).

Mr Awan worked for American Airlines as a security agent. His employment contract provided that he was entitled to six months’ full sick pay and, if sick leave continued, that he would benefit from a long-term disability plan which paid two thirds of his annual salary until the earlier of his return to work, retirement or death. These benefits were provided through a group income protection policy with Legal & General.

Mr Awan was signed off sick due to depression shortly before his employment transferred under TUPE (Transfer of Undertakings (Protection of Employment) Regulations 2006) to ICTS UK Ltd. After the transfer, ICTS put in place new insurance cover with Canada Life. Mr Awan remained on sick leave, but both Legal & General and Canada Life refused to provide cover for his disability benefit. Although ICTS paid the benefit for a number of months, it eventually decided to terminate Mr Awan’s employment for incapability.

Mr Awan brought claims for unfair dismissal and discrimination arising from disability. He argued that there was an implied term in his contract of employment preventing dismissal for incapability whilst he was receiving long-term disability benefits. However, the Tribunal held that there was no scope to imply a term which would contradict the express term allowing ICTS to terminate his contract on notice. The Tribunal concluded that ICTS had acted reasonably in dismissing Mr Awan for incapacity, and that the dismissal was not discriminatory because it was a proportionate means of achieving a legitimate aim.

The EAT allowed Mr Awan’s appeal and remitted the case to the Tribunal. The EAT held that the whole purpose of PHI and similar schemes would be defeated if employers could end employees’ entitlement to benefits by dismissing them when they became unfit for work. However, whether an employer had a right to do so depended on the construction of the relevant contract. In this case, there was a contradiction in the contract of employment. If ICTS were free to dismiss Mr Awan on notice under the termination clause, his contractual right to disability benefits would be meaningless. The EAT therefore concluded that a term could be implied into Mr Awan’s contract which read ‘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.’

This case highlights the importance of drafting termination provisions carefully to ensure that there are no inherent contradictions. It also confirms previous case law that a term may be implied into an employee’s contract stating that their employment cannot be terminated for incapacity whilst they are receiving PHI benefits, although the employer may still dismiss for good cause such as gross misconduct or redundancy. This case was unusual because the employee was entitled to receive benefits under the disability plan regardless of whether the insurer paid out under the policy. In order to avoid this liability, employers should ensure that employment contracts include a clause stating that benefits are provided subject to the rules of the relevant insurance policy.