An unsettling trend in insurance has recently become apparent. It is emerging that employers are being advised not to take out or renew group income protection insurance (GIP – also known as permanent health insurance), as such arrangements could create a conflict between the benefit provided by GIP and the freedom of the employer to manage his workforce.

The purpose of the GIP scheme is to ensure the employer's ability to continue to pay an employee who is unable to work by reason of incapacity – which is not always a disability defined under the Disability Discrimination Act (DDA).

During the past six to 12 months, we have received several enquiries regarding this, including an e-mail containing the following statement made by a solicitor:

"Most significantly, the payments cease if a person's employment contract is terminated. The problem for the company of having such a policy in place is that it creates an implied term in the contract that he will not be dismissed while he is receiving payments under the policy.

"The effect of this is that no matter how long an employee is off sick, the company cannot justify dismissing him by reason of this sickness.

"… where an employee has been off sick for two years but… could, in theory, return to work at any time meaning that his role cannot be filled during his absence… we would suggest that the company … cease providing this policy."

The reason that advisers believe it may impede an employer's ability to terminate an employee's contract is due to case law – see Aspden v Webb Poultry & Meat Group (Holdings) Ltd [1996] and Briscoe v Lubrizol [2002].

Breach of contract

An employer cannot terminate the contract of employment while an employee is on long-term sickness absence merely by reason of that absence, as this will deprive the employee of the contractual benefit. The contractual entitlement can be an express or implied term of the contract.

In the absence of an express term that allows the emp loyer to cancel the policy, the withdrawal of such a benefit would amount to a breach of contract.

The withdrawal of the policy without the employee's consent may give the employee the right to pursue a claim for breach of contract against the employer. If proven by the employee, he could be awarded his (previously insured) earnings up to his retirement age.

Disability discrimination

Further to that, a decision to withdraw a GIP scheme for all employees may also give rise to claims of disability discrimination.

Under the scenario posed by the solicitor, the reason for the withdrawal of the scheme may be because staff are or may be absent long-term, and the employer wants to be able to dismiss them. If an employee who is disa-bled is absent long-term, then the absence is disability-related.

. Does the withdrawal of such a scheme place a disabled person at a substantial disadvantage?

Quite possibly, yes; they may already be in the deferred period or they may have a progressive illness that is likely to lead to permanent absence in the future.

. Is it reasonable to expect the employer to take steps to continue to provide the policy?

This will depend on all the circumstances. The employer could fund the equivalent individual cover for the employees on a personal basis. This will mean that the employer can carry out the dismissal (subject to following correct procedures), but the employee is not placed at a substantial disadvantage. This would also meet the contractual point, as the employee will not have suffered any loss – but at an inflated cost to the employer.

. Is the reason for concern that employers would not be able to replace the absent employee?

This is not necessarily so. If an employee has been absent for a prolonged period and there is no prospect of return, the employer is entitled to consider whether or not they can continue to operate with temporary replacements. It may be reasonable to retain the absent employee 'on the books' but take on another permanent employee to perform their job.

The advice also ignores the benefits of a GIP policy: good employee relations, staff recruitment and retention and building workforce morale. Before rushing to cancel policies, employers should evaluate the benefits, as well as the potential legal risks involved in cancellation. Helen Wakeford is a company lawyer at UnumProvident.

Facts behind group income protection

The advantages of group income protection can be much more wide-reaching than simply paying benefits. GIP is designed to protect a company's profitability; to manage employees back to health; to increase the chances of employees returning to work earlier; and to provide rehabilitation and return-to-work programmes where necessary.

Of the 20 million employees eligible for group income protection in the UK, only about one in 10 have any such cover. Both the human and the financial costs of this shortfall are enormous. The average level of sickness absence for each employee is nine days a year ,at a cost of £567 per person. For a company with 50 employees, this would cost £28,350, according to the Chartered Institute of Personnel and Development.

A recent survey by the Confederation of British Industry found that more than half (52%) of the nation's employers admitted that they had not consulted their staff about healthcare and income protection benefits.

An estimated 11% of employers feel staff are happy with the health benefits they are offered by their company, while three-quarters of a typical company's staff claim there is a lot of room for improvement in healthcare and insurance provisions.

While 76% of staff would like the offer of group health insurance, only 20% of firms do actually offer it. 67% of employees would like GIP, but only 12% of companies provide it.

There are many additional expenses resulting from staff absence, including recruiting and training temporary staff, that can cripple their profit margins.

While there is a serious issue of workplace absenteeism, poor attendance is not a problem that employers have to live with. They can take strategic action to reduce absence levels and limit the financial impact of absence.

The main benefit to an employer of offering a group health scheme to employees is that it can reduce the amount of time employees are off work due to ill health. This is because it is possible to be diagnosed and treated a lot quicker within the private sector.