Managing incapacity: sickness absence

Section 2 of the Personnel Today Management Resources one stop guide on managing incapacity. Other sections.

The employment contract

The starting point for considering your liability when dealing with incapacitated employees will always be the contract of employment. The implied duty of trust and confidence fundamentally underpins the employment relationship. This duty requires an employer to behave in a fair and reasonable manner to an employee and requires the employee to be co-operative with the employer and obey lawful and reasonable orders.

The key principle in relation to contractual matters is that an employer will be held to the terms of the bargain made in the employment contract. Time and again, insufficient thought is given to standard form documentation so that employers end up with liabilities they never intended to assume.

Your duties regarding the working environment

In addition to the implied duty of trust and confidence, the employer is subject to a further implied contractual duty (see Health and safety of staff), which cuts across health and safety law: the obligation to take reasonable care of an employee's health and safety.

The courts and tribunals have told employers it is an implied term of a contract of employment that the employer will provide and maintain a working environment that is reasonably tolerable for all employees.

It is therefore very clear that all aspects of the working environment under your control, such as employee behaviour or the ergonomic set up of an office, will create liabilities if you allow an unsafe situation to develop and fail to manage risks. Where a contractual term is breached, an employer will be liable by way of damages for all economic loss which results from the breach. Remember that a sick employee cannot easily mitigate his loss by obtaining new employment, so damages payments can be significant.

SICK PAY AND THE EMPLOYMENT CONTRACT

When any employee is sick, the first thing the employer needs to consider is what the contract says about occupational sick pay. If you have a policy that allows employees a period of paid absence, the court or tribunal will hold you to the policy and take the view that the contractual provisions are there to deal exactly with the situation that has arisen.

There is an increasing market trend for employers to reduce their contractual obligations significantly in relation to sick pay, giving in their contract a short period of guaranteed sick pay and leaving all else for discretion. This gives you more flexibility and allows you to use your discretion wisely and only in respect of those you think reasonably merit it. Remember, however, that your legal obligation is to exercise discretion rationally and not capriciously. Take care that the decisions you make are not based on discriminatory grounds, especially if the person who is incapacitated might be considered to have a disability for the purposes of the Disability Discrimination Act (see Unfair dismissal).

In the absence of any other contractual provision on incapacity, the court or tribunal will expect you to continue an employee's employment for the purposes of receiving contractual occupational sick pay right until the end of the period you have provided for and that you will not deprive the employee of that right. With that in mind, we have provided a checklist of points to include in your policy (see above).

Employers are currently faced with spiralling absences. In addition to statutory sick pay, most offer enhanced company sick pay. Consider adopting a policy of requiring company sick pay to be conditional upon submission of a company doctor's sick note. Although this may create a lack of confidence in the independence of the company doctor, it may prevent employees malingering. Even if this is not desirable, opt for a procedure you are happy with and consider insisting that a sick note from the employeeGP should be provided for all periods of absence.

Consider how sick pay is structured

Consider how company sick pay should be structured and for what period. A rolling period can be used which would provide for full payment for a period of, say, 13 weeks. However, if the employee then comes back for even one day, that period will be triggered again. Adopt a rolling period to give yourself more flexibility.

Include your right to deduct sums awarded in litigation

In your sickness policy allow for the repayment of enhanced sick pay where an individual receives sums from a court or an out-of-court settlement for an accident that has led to his incapacity.

Consider withholding payments for self-inflicted illness

Consider withholding payments if the illness is self-inflicted, but take care when straying into the moral arena; even drug or alcohol abuse can relate to an underlying condition that is a potential disability, such as clinical depression.

Include in the contract your right to investigate

Policies should always deal specifically with the consent of the employee to the disclosure of medical records. This should be set out in black and white. The employee should also be made aware of your right to investigate. Not only is this necessary for the purposes of a fair procedure (see Unfair dismissal), but also in the context of considering reasonable adjustments for disability discrimination. It also potentially deals with human rights and data protection issues, as long as the wording is structured to give consent.

Reserve the right to dismiss in cases of long-term sick leave

It is common for employment contracts to reserve to the employer a right to dismiss employees in cases of prolonged incapacity, whether the absence is continuous or in aggregate and whether or not that individual has exhausted his or her right to occupational sick pay. This is acceptable if the wording is very clear.

PERMANENT HEALTH INSURANCE AND THE EMPLOYMENT CONTRACT

Your contractual obligations become complicated where you operate a permanent health insurance (PHI) scheme. The scheme will have rigid rules which remove a huge amount of flexibility in managing incapacity absences.

Breach of contract

Legal cases have made it clear, for more than a decade now, that where a PHI policy is in existence it would be a breach of the implied duty of trust and confidence for an employer to dismiss an employee for incapacity before they have had an opportunity to make a claim under that policy or during a period when benefits are payable. This is because, inevitably, it will be a term of the policy that the employee must remain employed to continue to benefit.

If you ignore this bar, the potential liability arising from the breach of contract you will commit is significant. Assuming the employee can demonstrate they would have continued in the scheme, or would have been accepted onto it, on the balance of probabilities, the claim for damages they have is to the amount of benefit that would have been received by virtue of membership of the scheme. Since incapacity in serious cases can last years, the damages can be a terrifyingly large sum.

Provision of PHI benefit

It is common for employers not to pay enough attention in the drafting of the provision of the benefit itself. It is extremely important, for obvious reasons, to make sure that your employees are only given a prospective right to benefit in the scheme and, only then, at the discretion of the insurers and on the terms and conditions of the scheme. All too frequently employees are given a right (by use of magic words like 'you will be entitled to. . .') to PHI without further qualification added. If, for any reason, the insurer declines to allow the employee onto the scheme, then the employee is perfectly entitled to ask you to make a substituted benefit on the basis that the promise was made. Such benefit could easily continue for a number of years and be very expensive.

Bridging the sick pay gap

Another important point is that employers must be very careful about how they bridge any gap between the end of occupational sick pay and the possible commencement of PHI benefits, most of which only usually start after six continuous months of absence. By continuing to pay sick pay where contractual sick pay would normally be exhausted, you need to be very careful that you do not inadvertently create a contractual right for the employee to claim ongoing payments from you, without limitation.

If you do make extra payments to tide people over between the end of occupational sick pay and the beginning of permanent health insurance benefits, you must make sure you do this on an entirely without prejudice basis and reserve the right to change your practice. It is essential that you make very clear the basis upon which payment will be made.

Implied duty of trust and confidence

The really vexed issue on PHI is, however, the extent of your obligations to comply with the implied duty of trust and confidence when dealing with a potential claim under the PHI policy to the insurers. Recent guidance from the Court of Appeal (in Briscoe v Lubrizol) has clarified this issue.

Under his contract of employment Mr Briscoe was entitled to the benefit of a PHI scheme. However, he was fired by his employer and thus deprived of benefit.

He brought a claim in the High Court in respect of the non-payment of PHI benefits.

The court looked at whether or not Lubrizol was justified in dismissing Briscoe, and decided that the principle to be derived from previous cases was that, while an employer ought not to be permitted to dismiss an employee to remove their entitlement to benefit under a scheme, the employer could dismiss for a reason unconnected with receipt of the benefit, for example, by reason of a fundamental breach of contract by the employee.

The court considered that Briscoe had acted in breach of contract by refusing to co-operate with the employer regarding the scheme and by his wilful disobedience of the employer's order to discuss the matter further - he had indicated that he no longer intended to fulfil his obligations under his contract.

The court, therefore, found that he had undermined the duty of trust and confidence and that Lubrizol could dismiss him, removing from him in the process PHI benefits, and not be liable for damages.

Of particular interest in the case was the view the court expressed about the extent of an employer's obligation to help an employee with a claim to the PHI insurers, given that the employer is normally the interface with the insurer.

The court considered that not only must an employer keep an employee on the payroll for the purposes of making an application to PHI, but that the employer should do everything reasonably possible to facilitate that application (and any appeal).

One judge in the case put this point very forcibly when he said the employer must "front an attack against the insurer but the declaration of war must be made by the employee". Stirring stuff, but it neatly underlines the point that you must go as far as you possibly can in assisting an employee with their claim.

Case studyMoneyspinners

Moneyspinners Ltd is a pan-European financial services provider. It has 2,000 employees in the UK and 4,000 globally. Under the terms of the company's sick pay policy, employees are entitled to up to 13 weeks' basic pay for sickness absence once they have completed six months of service. For absences exceeding 13 weeks, the company has a discretion to pay sick pay for a further 13 weeks depending on the circumstances. At 26 weeks the employee may or may not qualify for permanent health insurance provided by SickSupport Insurers.

Janice Jones has been employed by Moneyspinners for five years as an analyst. Since the birth of her first child 12 months ago, Jones has had a variety of medical problems including post-natal depression. This has resulted in her being absent through sickness for 20 weeks so far. During this period she has continued to be paid full pay.

Jones' manager is experiencing a downturn in work flowing through his department and has decided he needs to reduce headcount. For him, Jones is the obvious choice due to the amount of money she is costing his business unit.

He speaks to the HR department about the possibility of dismissing Jones. HR tells him that Jones' latest doctor's report confirms that she is severely clinically depressed and is likely to be off work long term. To complicate matters further, Jones submitted a holiday request three months ago for two weeks' holiday due to be taken in three weeks' time.

What is the position regarding Jones' holiday entitlement?

MODEL ANSWER

Identify the issues

To dismiss Jones in these circumstances could give rise to a number of possible claims including: disability discrimination and unfair dismissal. Most importantly, from a contractual point of view, Moneyspinners could also leave itself considerably exposed.

Breach of contract

The fact that Moneyspinners has continued paying Jones beyond 13 weeks, despite only having a discretion to do so, creates a potential issue for the company. In the absence of spelling out to Jones that the continued payments are discretionary only and may be withdrawn at any time, Moneyspinners may have given Jones a reasonable expectation that she will continue to be paid throughout her absence up to 26 weeks in any event. If Moneyspinners suddenly stops paying Jones or takes steps to dismiss her, then at the very least she may have a breach of contract claim for six weeks' full pay. This would be on the basis that to deprive her of such payments when she had a reasonable expectation could amount to breach of the implied term of mutual trust and confidence.

The real issue is that the breach will not necessarily result in losses incurred during the six-week period up to the end of her contractual sick pay. It could also stretch to financial compensation for the loss of the opportunity to claim PHI.

Quite clearly, given the nature of Jones' condition and the current prognosis, Jones is a potential candidate for PHI. If Moneyspinners now deprives her of the opportunity to apply for PHI then it may face the consequences financially. This is because to discontinue payments and not allow Jones to make an application could amount to a breach of an implied term of Jones' contract.

The solution

If the prognosis is as negative as it sounds, this could mean Jones will be unable to work for a year or longer. Clearly, the value of the potential breach of contract becomes increasingly significant. To mitigate this risk, Moneyspinners should contact Jones and explain that it will stop paying her sick pay in six weeks in accordance with its policy and remind her of the possibility of making a claim under the PHI policy. If Jones is deprived of the opportunity to make an application for PHI in breach of her contract then Moneyspinners will be potentially liable for the loss of that benefit. Moneyspinners must therefore be proactive and remind her of her opportunity to make a claim.

Breach of the implied duty of trust and confidence

The implied duty of trust and confidence fundamentally underpins the relationship between Jones and Moneyspinners. It requires Moneyspinners to behave in a fair and reasonable manner. Once again, to stop paying Jones after 20 weeks of sick pay where Moneyspinners has not qualified its discretion to do so could give rise to this sort of claim. The potential value of Jones' claim can be estimated to be a year's salary minimum before Moneyspinners has even taken into account its other potential liabilities.

Possible compensation

Unfair dismissal: Whether or not Jones has a potential claim for unfair dismissal will depend very much on the procedure adopted by Moneyspinners. If she is not genuinely redundant and Moneyspinners fails to follow a fair procedure involving consultation, fair selection and consideration of alternative employment, then she will have grounds on which to bring this claim. Damages for unfair dismissal are capped at £53,500. Unfair dismissal is considered in some detail in Unfair dismissal.

Disability discrimination: The prognosis received by HR from the company doctor indicates that Jones' condition is likely to be long-term and a condition which therefore fall within the definition of a 'disability' under the Disability Discrimination Act 1995. To the extent that it does, and Moneyspinners will need more medical evidence before this issue is determined definitively - to make Jones redundant without first satisfying its duty to consider reasonable adjustments is likely to leave Moneyspinners exposed to this claim. Damages for disability discrimination are uncapped and are based on loss of earnings (as for unfair dismissal), injury to feelings and in very rare cases, aggravated damages.

Managing Jones back to work

To make Jones redundant could clearly be the wrong move for Moneyspinners. Rather, it needs to ensure that it manages Jones closely and supports her in whatever ways it can to aid her recovery and get her back to work. This will involve, in the short term: