The hidden side of permanent health insurance

Permanent health insurance can be offered to employees to cover the event that they become ill and unable to work. While this benefit can be useful to employers when attracting employees, employers need to be aware of the potential hidden costs.

What is Permanent Health Insurance?

Permanent Health Insurance (PHI) is insurance that can be put in place by an employer to provide an ongoing benefit where an employee falls ill and is unable to return to work. In most PHI policies it is a condition that the employee remains an employee despite them being unable to work. These employees therefore remain on an employer's 'books'.

The arrangement will generally be governed by an agreed insurance policy between the employer and the insurance provider. The employee is simply a potential beneficiary of the policy for when the necessary qualifying conditions arise. The benefit under the PHI policy is usually provided until the earlier of the employee's death, retirement or until the employee returns to work and the duration of cover can therefore vary greatly from case to case. It is for the employer, with the insurance provider, to determine the appropriate level of benefit that the insurer will provide when circumstances do arise which prohibit an employee returning to work as a result of illness.

Given their vast marketplace, PHI policies vary considerably and it is commonly the case that both employers and employees often do not know what is covered until a claim is made. It is important that employers provide correct and accurate information about the policy in place to employees. Similarly it is particularly important for the employer not to provide any wider protection (such as additional benefits or extended cover) than that stated under the terms of the policy, whether within the employment contract itself or any other staff handbook or policy. To do so could mean that the employer may incur addition and substantial liabilities for which it will not be insured.

Can employees in receipt of PHI be dismissed?

It would defeat the object of PHI if, when an employee became eligible to make a claim under a PHI policy, an employer could simply terminate their employment and in doing so end their right to claim the applicable benefit.

Employers may however want to retain the right to dismiss an employee due to their absence, despite the effect on PHI benefits. In such situations, it is sensible for the employer to reserve the right in the contract of employment to terminate employment even if this defeats the employee's PHI benefit.

Where there is no such express right, aside from normal considerations of unfair dismissal and disability discrimination, the employer must also consider whether a dismissal could be deemed to be a breach of an implied term in the employment contract, namely that once the employee has become entitled to PHI payments they cannot be dismissed simply because they are unable to work. Case law has confirmed that employers can dismiss for acts of gross misconduct committed during the period of benefit and for redundancy (providing that there is a genuine redundancy situation and that the specific reason for dismissal is not to defeat the employee's PHI benefit). Nevertheless, an employer should take care in dismissing an employee in receipt of PHI benefit as those employees may still have the option of bringing a claim for unfair dismissal as well as claims for disability and potentially very large claims for breach of contract if an employer were to get it wrong.

Employers' duties

The employer has a general duty to assist an employee to secure benefits under a PHI policy, but overall owes a continued duty of trust and confidence to the employee whilst in receipt of PHI benefits. On top of this, the employer has a duty to make reasonable adjustments where the employee is disabled. A fundamental breach of the implied duty of trust and confidence will entitle the employee to resign and claim constructive unfair dismissal. Any such resignation would mean that the employee loses any benefit to PHI which he/she will seek to recover as damages. Employers should therefore

• maintain appropriate levels of contact with such employees
• obtain regular updates on progress / medical position
• make reasonable adjustments where possible
• otherwise act appropriately throughout any period of absence.

Holidays and PILON

One drawback of PHI is that an employee's holiday continues to accrue while they are incapacitated. Where such accrual is not covered by the terms of the PHI policy in place, over several years of absence employers may find that they owe substantial amounts in respect of accrued untaken leave.

Under the Working Time Regulations an employer is prohibited from making a payment in lieu of notice in respect of such holiday pay unless the employee's employment is terminated so preventing an annual payment for accrued holiday. The employer may specify that the employee is deemed to be taking their annual leave entitlement on certain days, however the employee has the right to object to this. The employer therefore may have no choice but to make a substantial payment in lieu upon termination, whenever that may be.

A second question is at what rate of pay should the employee's accrued holiday pay be calculated? The employer could either pay the employee's full wage or the employee's PHI income (often set at 75% of full basic wage). Unfortunately case law has not clarified which of these is the correct option.

What should employers do?

To avoid costly claims involving PHI benefits employers should:

• understand the terms of the PHI policy in place
• ensure that PHI benefits are accurately communicated and that contractual terms do not go beyond the benefits offered under the policy
• expressly reserve the right to terminate within the contract of employment even if this defeats the employee's PHI benefit
• don't dismiss with the sole intention of depriving an employee of PHI benefits
• express the right to change the PHI provider, level or extent of cover or remove the benefit entirely
• include a contractual provision the employee must take their holiday entitlement on any days notified to them where they are on long term sick leave