Some lessons to be learned about long-term disability plans for employees…

The EAT has determined that an employer is not able dismiss an employee who is in receipt of payments under a long-term disability plan, on grounds of incapacity, even if the contract of employment allows this.

The EAT judge held that a term was to be implied into a contract of employment 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’ in circumstances where in the contract of employment the employee had a contractual entitlement to payments under a long-term disability plan until their return to work, retirement or death and the employer had a contradictory unfettered right under the contract to give notice of dismissal, with the effect of frustrating the purpose of and functioning of the long-term disability plan.

This case also involved a TUPE transfer of the employee’s employment resulting in the insurers refusing to pay out under the scheme for the employee  and so leaving the new employer personally liable for the ongoing payments to the employee under their contract of employment.

Consequently, in order to try and avoid this unfortunate situation arising, it is advisable when drafting clauses in a contract of employment that provide for a disability benefit to state that eligibility for disability benefits is subject to the provisions of a relevant insurance policy or the rules of the particular insurance provider, and/or that the employer’s obligation to make payments to the employee will only arise if and when payments were paid out by the insurer.  An employer could also contract with the insurer on terms that ensure continuing cover for the employee once benefits are accruing, even if the employee ceases to remain an employee of the company. Further, in a TUPE situation, a transferee should ensure that as part of its due diligence it reviews any contractual terms relating to long-term disability cover and related insurance policies and ideally agrees warranties and indemnities from the transferor in respect of any liabilities.