Can an employee be dismissed for incapability if their contract provides long-term disability benefits?

Incapability dismissal may be unfair and discriminatory if employee is contractually entitled to income when incapacitated by permanent disability.

In Awan v ICTS UK Ltd, the EAT held that an employee with permanent health insurance (PHI) benefits in his contract could have been unfairly dismissed and discriminated against on the ground of disability when he was dismissed for incapability.

Mr Awan, an Internal Security Co-ordinator working at Heathrow, TUPE transferred from American Airlines to ICTS. His contract included six months full sick pay. After that period, if sickness continued, the employee was entitled to two-thirds of full pay until return to work, retirement or death. The contract stated that Mr Awan could be dismissed on notice. It did not expressly state that he could be dismissed for incapability.

Canada Life, the new insurer providing long-term disability benefits following the transfer, refused to cover any employees who were already off sick at the time of the transfer (such as Mr Awan). The old insurer, Legal & General, agreed to continue the cover for Mr Awan only until a specified date as a gesture of goodwill. ICTS then took over the payment for a number of months but commenced a capability process which led to Mr Awan's dismissal.  

Mr Awan brought unfair dismissal and discrimination arising from disability claims to an employment tribunal. The tribunal found that the employer had acted reasonably in dismissing him for incapability and that the decision to dismiss not discriminatory as it was justifiable as a proportionate means of achieving a legitimate aim.

The EAT disagreed and remitted the case to the tribunal. It held that there was a contradiction in the employment contract between the contractual entitlement to long-term disability benefits and the right to dismiss on notice. The EAT commented that, if the employer could simply dismiss for incapability, there would be no circumstances in which it was obliged to continue to pay long-term disability benefits if it preferred not to do so. Mrs Justice Simler therefore held that a term could be implied into the contract that "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.". She also held that ICTS was in breach of this implied term.

Employers should take advice before dismissing on grounds of capability where such benefits are available where employment continues. An unusual feature of this case was the fact that the employee (whose contract commenced in 1992) was entitled to receive long-term disability benefits whether or not the insurer agreed to pay out under the policy. When entering into employment contracts, employers should ensure that any such contractual benefits are made subject to the rules of the insurance policy and make clear that the employer is not obliged to pay if the insurer refuses to provide the benefit. When taking on employees in a TUPE transfer, employers should be alert to the possibility of significant liability where generous PHI benefits are part of legacy contracts.