Implied term prevented employer dismissing employee whilst receiving long-term disability benefits

The EAT implied a term into an employee’s employment contract which prevented the employer dismissing him on grounds of incapacity whilst he was entitled to long-term disability benefits.

Facts 

In Awan v ICTS UK Ltd, Mr Awan’s contract provided that after six months’ absence on sick leave he was entitled to disability benefits. He would be paid two thirds of his salary until he returned to work, retired or died.  It also provided that the employer could terminate his employment by giving notice.  

Mr Awan’s employment had transferred to ICTS under TUPE at a time when he was already on sick leave, but before he was entitled to receive long-term disability benefits.  ICTS’s insurers refused to cover Mr Awan as he was on sick leave when the policy was taken out.  His previous employer’s insurers agreed to cover him as a gesture of goodwill but when those payments ceased ICTS terminated his employment on grounds of incapacity.  

His claims for unfair dismissal and disability discrimination were rejected by the employment tribunal.  It ruled that his contract entitled him to long-term disability benefits but it refused to imply a term that ICTS could not dismiss him on grounds of incapacity whilst he was entitled to those benefits.  As there was an express contractual term which allowed ICTS to terminate by giving notice, it considered that it could not imply a term which contradicted that express term. 

Mr Awan appealed successfully to the Employment Appeal Tribunal (EAT). 

Decision

The EAT considered that the terms of the contract were inherently contradictory.  The whole purpose of providing long-term disability benefits would be defeated if ICTS could simply terminate Mr Awan’s employment for incapacity.  It was therefore possible for it to imply a term that ICTS would not dismiss Mr Awan whilst he was entitled to long-term disability benefits.  

As a result, his dismissal was in breach of contract and whilst this did not automatically mean that his dismissal was unfair, a breach of an implied term of this sort was a highly relevant factor when assessing fairness.  The tribunal’s finding that the dismissal was fair and not discriminatory (as it was justified) could not stand and the EAT sent the case back to a different tribunal to consider these issues.  

Implications

Employers need to be careful when dismissing an employee who is entitled to long-term disability benefits. A dismissal in breach of an implied term that they will not dismiss for incapacity whilst the employee is entitled to disability benefits is likely to be unfair and discriminatory, as well as being in breach of contract.  Compensation for such claims would include the lost disability benefits and so could be very costly.  

Whether a court will imply a term preventing dismissal on grounds of incapacity in such circumstances will depend on how the contract is drafted.  A court will generally not imply a term which contradicts an express term but may be prepared to do so if the contractual terms are contradictory.  Employers who want to be able to terminate employment on incapacity grounds notwithstanding the employee’s entitlement to long-term disability benefits will need to make it very clear in the contract they are reserving the right to do so.  Employers can also limit their liability by making it clear in the contract that disability benefits are insured, are subject to the terms of the insurance policy and that if the insurer refuses to pay out the employer has no obligation to  continue the payments.