Income protection policies are a popular employee benefit. However, they throw up a few legal and practical issues that should be addressed to ensure employees are clear on the extent of the benefit and that employers mitigate against the risk of breach of contract and unfair dismissal claims.

Income protection is an insurance benefit that provides income to an individual if they are unable to work for a long period of time due to illness or injury. Subject to conditions, the employee will be entitled to receive a proportion of their usual salary for a period specified under the policy. The period usually begins after they are no longer entitled to their Statutory Sick Pay and ends when the employee is either well enough to return or when they reach the end of the payment period. It can also provide proactive rehabilitation and supports employees to return to work as soon as possible.

The most essential criteria for an individual to be eligible for benefits under an income protection policy is that they are still in employment with the employer who has the policy. Otherwise, the purpose would be defeated if the employer could simply dismiss a sick employee to deprive them of that benefit. In Aspden v Webbs Poultry and Meat Group (Holdings) Ltdthe employer dismissed the employee during a period of sick leave but before they became eligible for income protection. The court held that there was an implied term to the effect that the employer would not terminate the contract while the employee was incapacitated for work and that he qualified for benefits under the insurance policy.

The decision in Aspden envisaged that dismissal can still take place for “good cause”, even where its effect will be to remove the employee’s income protection benefits. Hill v General Accident Fire & Life Assurance Corp Plc helps to clarify what “good cause” is for employers to dismiss an employee. It can include but not limited to gross misconduct and genuine redundancy situations. In this case, the Court held that the employer had not breached the employment contract by making the employee redundant while he was on sick leave even though he was close to qualifying for income protection benefit. This meant that there is no implied right for an employee to remain in employment while sick merely because the employee had or would soon acquire the right to receive benefit under an income protection policy. If the employee’s role is redundant or their conduct is found to be repudiatory, the employer can legitimately dismiss the employee regardless of their eligibility for income protection.

However,  in Lloyd v BCQ Ltd, the court moved in a different direction and decided that where there is an express contractual term permitting termination of a long-term incapacitated employee, it may override the implied term relied upon in Aspden. In this case, the employment contract contained an express term which permitted dismissal in the event of long-term incapacity. It didn’t reference an income protection policy and it did include an entire agreement clause. The employee was dismissed due to the length of his absence and had no prospect of returning to work while he was in receipt of income protection benefits. He argued that he couldn’t be dismissed to remove his entitlements according to the Aspden decision. However, the court decided that the Aspden implied term couldn’t apply to this case because it contradicted the express term in the employment contract.

However, caution is still advised when relying on an express clause to dismiss an employee on long term sick leave as in the case of Awan v ICTS UK Ltd. It was held the employer had breached the implied term not to dismiss an employee while they were entitled to long term benefits as per the Aspden ruling, despite there being an express termination clause. The clause provided for the power to terminate in general terms and did not expressly deal with incapacity or reserve the right to dismiss without cause. Although a well drafted clause to dismiss a long-term incapacitated employee may avoid a breach of contract, there may still be an argument that it amounts to unfair dismissal or discrimination.

Employers should also make sure their clause is very clear on any qualifications for the benefit and the extent of the employer’s obligations on payment, and variation or withdrawal of any benefits as well as the right to take holiday and top up of payments. A detailed policy covering these items should help to avoid dispute.