The Employment Appeal Tribunal (EAT) has decided a significant point in relation to the effect of permanent health insurance (PHI) on compensation for discrimination.

The employer in this case had a flexible benefits scheme, which meant that employees could construct a benefits package tailored to their lifestyle. An employee on long-term sick leave was receiving PHI equivalent to 75% of his salary – this was the default position under the flexible benefits scheme, but he could have opted to reduce his cover to 50% in return for extra salary.

The employee brought a claim for harassment and disability discrimination against his employer in an Employment Tribunal and was successful. In the remedies hearing, the Employment Tribunal decided to deduct from the compensation, in respect of the PHI, 50% of salary and not 75% of salary. The employer appealed the decision on the basis that the deduction should be for the full 75% of salary.

Previous case law has decided that, where a claimant has taken out insurance, any payments received are not deductible from compensation because the employee should not be deprived of the benefits of insurance for which they have paid. However, where PHI premiums have been paid by an employer, the insurance payments received are deductible in full from compensation. The issue in this case was whether the employee should be treated as having paid to increase the level of salary protection from 50% (which was automatic under the scheme) to 75%.

The EAT upheld the Employment Tribunal's decision in relation to the assessment of compensation. This was on the basis that, as the employee did not get the additional salary he would have received under the 50% benefit, he had contributed to the insurance premiums. Therefore, the Employment Tribunal was correct to only deduct PHI equivalent to 50% of salary rather than 75% of salary.

This is an important decision for employers who operate flexible benefit plans where employees can choose level of cover in exchange for deductions in salary. It is also a useful reminder of how compensation is calculated when an employee is receiving PHI benefit.

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