Permanent health insurance benefits: why the contract is ‘King’

But the rights and obligations that are often attached to this type of benefit are routinely overlooked and can be unduly restrictive on your freedom to bring to an end the employment relationship. The key is to ensure that the necessary flexibility is built into the contract of employment to protect your business from financial exposure. Our Head of Employment Law, Harmajinder Hayre, takes a look at the issue.

What is PHI?

It’s an insurance that provides an ongoing percentage of the employees’ salary if the employee falls ill and as a result, is unable to work. The benefit is usually provided until death, retirement or until the employee returns to work. Unusually for the employer/employee relationship, there are three parties to the relationship – the employer, the employee and the insurer. The policy is between the employer and the insurer so that employees are simply beneficiaries under the policy. It is for the employer, with the insurer, to determine the appropriate level of benefit that the insurer will provide when an employee is unable to return to work as a result of illness.

In my experience of dealing with PHI related matters, because PHI policies vary considerably, it is commonly the case that employers, employees and the insurer do not know what the PHI policy covers until a claim is made. Disputes concerning PHI entitlements are on the up. There are a variety of reasons for this: employers facing headcount restrictions; the employer still having to pay additional benefits such as cash allowances or a car allowance for an absent employee; insurers trying to limit the number of active claims after a routine review; because insurers are concerned about ongoing liability for potentially long lasting claims; or business sales are contemplated.

The questions I am often asked about include;

• Can I dismiss the employee?
• How does the employment contract interact with the PHI Policy?
• What is the meaning of “unable to work”?
• What are my duties to an employee entitled to PHI benefits?

In any PHI dispute, the starting point is to focus your attention on the employment contract.

Can you dismiss an employee in receipt of PHI?

Yes – if you have expressly reserved the right to terminate employment in the contract of employment, even if this overrides the employee’s right to PHI. However, given that this would be contrary to the purpose of having the PHI policy in the first place, the express term would need to be very explicit to be upheld. Such an express term can refer to termination either before and/or after the benefit becomes payable.

If you do not have in place an express right of termination in the contract of employment, then you risk an implied term being implied into the contract of employment that you cannot terminate the employment relationship. What this means is that you cannot bring to an end an employee’s employment where the purpose is to defeat an employee’s claim for PHI, or even arbitrarily where the effect is to defeat an employee’s claim for PHI. An implied term should not prevent you from terminating employment on the grounds of gross misconduct, redundancy and when you have good cause.

To minimise the risk of employees remaining on your books for lengthy periods, and the risk of financial liabilities up to the date of retirement, you may want to consider putting in place a PHI policy which contains a “sunset” provision. This could be 2 or 5 years of PHI payments, as opposed to until the date of retirement.

ACTION POINT: Check the contract of employment to determine whether you have the express right to terminate employment when an employee is in receipt of PHI.

The employment contract v’s the PHI Policy

Most employers refer to the PHI benefit within the employment contract and also reference supporting documents. You should be careful that when you describe the PHI benefit in the employment contract you do not describe a wider provision of benefits that the insurer will, in fact, cover, or you run the risk of incurring substantial liabilities. In many instances, the PHI policy document that the insurer has drafted will contain restrictions, which are not referenced in the PHI entitlement clause contained in the contract of employment and will become apparent to you and the employee when a PHI claim is likely to be triggered. In these circumstances, you run the risk of your contractual liability not being limited by the restrictions in the PHI policy, which could leave you with a financial exposure for which you are not insured.

The key is for you to ensure that the PHI policy is accurately described in the contract of employment itself and in any other document that is expressly or impliedly incorporated into the contract of employment. You need to guard against extending cover, in circumstances that are not backed up by the PHI policy, or you could end up finding yourself liable for long-term sickness benefits for that employee.

ACTION POINT: Check whether the contractual clause in the employment contract mirrors the terms of the PHI policy. Also, the PHI policy terms are expressly incorporated into the contract of employment.

The meaning of “unable to work”

Under the PHI policy, employees will only be entitled to receive benefits if they are, “unable to work”. Does this mean unable to do any work at all (which would exclude an employee who could carry out some work) or does it mean the job they are employed to do. If you don’t address this question at the time that you take out the PHI policy, then you run the risk of the courts reaching their own interpretation. It’s possible to purchase PHI policies that now distinguish between “any occupation” cover which expressly requires employees to be unable to work at all, and “own occupation” cover, which protects employees who are unable to carry out the job that they are employed to do.

ACTION POINT: Check your PHI policy to understand what type of cover you have in place.

Your duty to assist your employee

Where your employee is contractually entitled to PHI benefits, you are bound to take all reasonable steps to secure those benefits from the insurer. Failure to do so could give rise to a breach of the implied duty of trust and confidence if you do not take reasonable steps to secure PHI benefits from the insurer – this may involve pursuing the insurer in the courts.

ACTION POINT: Check the contract to determine whether you have excluded the right to litigate on behalf of the employee where the insurer has refused cover.

Case Study 1

I was recently involved in advising an employer on the practical steps available to it, where an employee had been on long term sick for several years due to incapacity and had been exercising his right to PHI benefits under the contractual PHI scheme. The employer wanted to replace the employee with a permanent member of staff and get the employee off their books. The employer did not have an express contractual right of termination in the contract of employment to bring to an end the employment relationship. There were still many years over which the insurer was obliged to pay the employee out under the PHI scheme, so long as he remained incapacitated to undertake his previous role.

We successfully advised the employer to approach the insurer to see whether they would be prepared to make a lump sum payment with an appropriate discount for accelerated receipt as part of an exit package underpinned by a settlement agreement. Depending on how the payment is structured there is scope to also pay the lump sum tax free.

This was a win for all parties – the employer who managed to move the employee off their books; the insurer who wanted to reduce the number of active claims; and the employee who was willing to exit the business subject to a satisfactory settlement package.

Case study 2

An employer had been notified by the insurer that PHI cover would be coming to an end for one of their employees, who had reached the age on which cover had ceased. The employee had received PHI for a considerable number of years and had played no active part in the business. His previous role had been backfilled by a permanent replacement for some years. However, the employee was still employed by the employer and on their books. The fact that PHI cover would be coming to an end did not automatically mean that his employment would also come to an end. We were able to successfully guide the employer through following a fair process, obtaining their own up to date medical evidence, considering adjustments and any disability related factors in order to time the employee’s dismissal on the grounds of capability with the ending of their entitlement to PHI benefits.

PHI benefits, unlike salary and bonus payments, are not always on the top of an employers and employee’s mind when entering into a contract of employment. By its’ very nature, it’s a latent entitlement which comes to prominence on the occurrence of incapacity of an employee.

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