What is permanent health insurance?
Permanent health insurance (most commonly referred to as PHI) is a form of insurance that is usually taken out by an employer to provide benefits to employees if they become incapacitated and unable to work due to long-term sickness. The benefit commonly takes the form of a payment from the insurer, via the employer, to the employee. This comprises a percentage of their gross salary, which is usually between 50%-70%, depending on the provider. Benefits remain payable to an employee if they remain unable to work, potentially until the employee's retirement age. Issues may arise where an insurer or employer want to end provision of the benefit. These are explored below together with consideration, following a recent employment case, of how of loss of income following dismissal is calculated for employees in receipt of PHI.
Circumstances may arise in which employers seek to dismiss employees in receipt of PHI. This can be where:
- the employer still finds itself incurring costs for these absent employees (sometimes in the form of other benefits or cash allowances, such as car allowance)
- the employer is facing headcount restrictions, and an employee in receipt of PHI will still be "on the books" and occupying headcount for these purposes
- when business sales are contemplated.
Risks which arise from dismissing employees in receipt of a PHI benefit may include:
- breach of contract claims where courts imply a term into the employment contract preventing dismissal if this would deprive the sick employee of benefits to which they would otherwise become entitled under such a scheme)
- unfair dismissal claims
- disability discrimination claims (as often those employees in receipt of PHI will be more likely to satisfy the legal definition of disability, in part because of the long-term nature of their illness).
In seeking to limit liability in respect of breach of contract claims, employers should ensure that their contracts of employment expressly permit termination of employment, even if an employee is receiving benefits under the PHI scheme and the dismissal means they are no longer able to claim the benefit.
In any event, an employer should undertake a thorough capability process, with due regard to reasonable adjustments that might be recommended by occupational health, in order to try to limit the risk of successful unfair dismissal or disability discrimination claims arising on dismissal.
Insurers may seek to settle an individual claim by making a lump sum payment to the employer. This can happen for a variety of reasons, including insurers wanting to try and limit the number of active claims after a routine review, or because insurers are concerned about ongoing liability for potentially long lasting claims. This can often be coupled with the employer broaching a wider settlement with an employee, whereby the employer passes on the settlement sum from the insurer to the employee in return for their employment ending, and the employee signing a settlement agreement waiving claims against the employer. While such terms will not always be accepted by employees, we have, over recent years, seen a number of agreements reached on this basis.
If this should arise, there are a number of points for the employer to consider, set out below.
Who is the offer made out to?
As the insurance contract is usually between the employer and the insurer, the offer will usually be made out to the employer. However, the employer is only likely to want to accept the offer if settlement of the claim is in turn reached with the employee.
Often such offers by the insurer have a limited window for acceptance. If employers are going to attempt to use the settlement sum to reach settlement with the employee, it is helpful to keep the insurer up to date, and to ensure the offer does not lapse. It may be necessary to ask the insurer to extend the window for acceptance of the offer, to allow time for agreement to be reached with the employee.
Mechanics and conditionality
If an agreement in principle is reached with an employee, issues to consider include:
- Whether the parties to the settlement agreement should include the third party insurer. In our experience insurers have not found this necessary (we presume because they do not have any contractual relationship with the employee), but we suggest employers check this point in each case.
- Clarifying that payments made to the employee are conditional on the sum being received by the employer from the insurer, and if no such payment is received, no payment will in turn be made to the employee.
- Timing of acceptance of the insurer's offer. In practice, it will be safest to do this once the employer is in receipt of a signed settlement agreement from the employee.
A further, but often crucial, point to consider will be taxation of the payment. Often employees ask for such payments to be paid tax free, on account of the exemption permitting payments on account of injury or disability to be paid tax free under section 406 of the Income Tax (Earnings and Pensions) Act 2003.
Before agreeing to this, we suggest that advance clearance (or, more specifically, a binding reply) is sought from HMRC on the issue by the employer.
HMRC guidance confirms that payment must be solely on account of disability, and should not be made on account of the employee's potential employment claims, such as disability discrimination. If an additional payment is to be made to the employee as part of the settlement that is in relation to potential employment claims, it is therefore advisable to split them out so that the two payments can be afforded the appropriate tax treatment.
Calculation of loss of income in a dismissal claim where PHI benefit is part of a flexible benefits package
If settlement is not on the horizon and an employee in receipt of a PHI benefit is dismissed, recent case law has provided useful guidance on how loss of income might be calculated in a tribunal claim, specifically when an employer offers PHI as part of a flexible benefits package.
Usually, when calculating loss of income, suffered as a result of unlawful discrimination, for example, claimants should only be compensated for their actual loss incurred. Therefore payments received by an employee from a PHI policy arranged and paid for by the employer should usually be deducted from loss of income. There is, however, an 'insurance exception' which was recently considered by the Employment Appeal Tribunal (EAT) in Colt Technology Services Ltd v Brown (UKEAT/0023/17 and UKEAT/0024/17).
Under a flexible benefits package the employee (Mr Brown) had agreed to receive a lower salary from his employer (Colt) during employment in return for an additional 25% salary protection. Following two breakdowns in 2012, Mr Brown has been on long-term sick leave receiving PHI equivalent to 75% of his salary which comprised (a) cover as part of the employer’s compulsory benefits scheme which provided up to 50% of income protection and (b) additional cover as part of the employer’s flexible benefits scheme which enhanced cover by 25% to a total of 75% of income protection. He could have chosen to reduce his cover to 50% in return for additional salary.
Mr Brown had been placed at risk of redundancy but that process ceased once he became ill. He was still employed at the date of the employment tribunal hearing, but his imminent return was unlikely. Following successful harassment and disability discrimination claims by Mr Brown against Colt, the employer appealed to the Employment Appeal Tribunal (EAT) against the employment tribunal's assessment of compensation for lost earnings and whether there should there be a 50% or a 75% deduction from loss of earnings in respect of PHI payments.
The EAT agreed with the employment tribunal that, while Colt had paid insurance premiums for the PHI policy, Mr Brown, by not choosing additional salary under the flexible benefits package, had indirectly contributed to those PHI premiums. This meant that the tribunal was correct to only deduct PHI equivalent to 50% of salary in assessing Mr Brown's loss (rather than 75%, as argued by Colt). This followed the "insurance exception" to the general rule that claimants should only be compensated for actual loss. This exception ensures that an employer should not be able to benefit from an employee's prudence in taking out insurance.
The benefit of PHI to employees is clear and ending it at the behest of the insurer, or due to an employer's business reasons, needs careful management and planning. Any compensation for loss of earnings in the context of an employment tribunal claim should take into account the whole flexible benefits package offered to an employee to ensure that the correct deductions are made.