Legal Q&A: Dealing with long-term sickness

Pattie Walsh of Richards Butler International outlines the legal implications of dismissing staff on long-term sick leave.

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.