A landmark tribunal ruling has paved the way for unfairly sacked employees to claim for loss of future earnings even when claiming incapacity benefits. Adam Fuge outlines the case, and explains what this means for employers.

In the recent combined appeals of Sheffield Forgemasters International Ltd v Fox and Telindus Ltd v Brading the employment appeal tribunal was asked to decide whether a claimant who is in receipt of incapacity benefit should be able to recover compensation for loss of earnings for the period that they received the benefit.

Mr Fox and Ms Brading each succeeded in their employment tribunal claims against their employers, with the respective employment tribunals finding that Mr Fox had been discriminated against on the grounds of his disability and that Ms Brading had been unfairly dismissed.

When assessing the compensation to be awarded, the tribunals had to consider what earnings each claimant would have been likely to receive if they had not been discriminated against or unfairly dismissed. The employers’ argument was that during the period that each of the claimants was receiving incapacity benefits, they would not have been able to work in any event (and therefore would not have received any earnings even if not dismissed or discriminated against).

On that basis, the employers argued, any financial loss suffered was not caused by the dismissal/discrimination and therefore no compensation should be awarded for that period.

Loss of earnings

In both cases, however, the employment tribunals held that the fact that Mr Fox and Ms Brading each received incapacity benefit did not prevent them from receiving compensation for loss of earnings during that period. Sheffield Forgemasters International Ltd and Telindus Ltd each appealed against the tribunals’ decisions. The employment appeal tribunal rejected both appeals.

This decision may appear surprising at first. After all, compensatory awards for unfair dismissal are largely based on the employee’s loss of earnings suffered as the result of the dismissal (the same is true of discrimination compensation although other factors may also apply). Why then, should an ex-employee receive compensation for a period in which they would not have been able to work whether dismissed or not?

However, the EAT’s decision is clearly the right one given the way that entitlement to incapacity benefit is decided. The crux of the EAT’s decision was that merely being in receipt of incapacity benefit is not in itself conclusive evidence of being unable to work. The statutory test for eligibility does depend on an applicant being ‘incapable of work’ but this phrase has a much more limited meaning in the context of incapacity benefit.

There are separate tests for the initial 28 weeks of incapacity and for any subsequent period. Without getting too bogged down in the intricacies of benefits applications, the EAT’s point is best illustrated by the test for the second period: In such cases, an applicant is deemed to be ‘incapable of work’ if they achieve a score of 10 or 15 on a personal capability assessment (PCA) against various criteria set out in statutory regulations. A person can achieve a score of 15 if, for example, he or she cannot walk up and down a flight of 12 stairs, or if he or she is blind.

In both examples, despite the fact that the individual concerned may obviously be perfectly capable of carrying out a wide variety of jobs, they would be eligible for incapacity benefit.

Test scores

The EAT observed that many of the people who would obtain the score of 15 on a PCA test “who, if unfairly dismissed and would thereafter quite properly claim incapacity benefit, would automatically be barred from damages for loss of earnings [in the second period of incapacity benefits] if the [employers’] case is correct.” It therefore concluded that the fact that an individual has obtained incapacity benefit does not in itself show that he or she might not have been able to work and earn money.

In respect of Sheffield Forgemasters’ appeal, the EAT pointed out that there was ample evidence that Mr Fox was able to work during the period when incapacity benefits were paid. The EAT also pointed out, however, that there might be cases in which the employment tribunal has evidence of the basis of the claim for incapacity benefits and the material adduced in support of that claim, which undermine any claim that the claimant was fit to work during a particular period.

This is a useful reminder to employers who are defending claims from ex-employees of the need to seek full disclosure both of their former employee’s attempts to find a new job and, if there is any argument that the employee is unable to work for health reasons, of the background medical information. Where the ex-employee in question discloses that they have applied for incapacity benefit, employers should seek disclosure of that application and any supporting documentation.

It should be noted that the incapacity benefits system on which this case was decided was replaced in respect of new claims made from 27 October 2008 by the new ’employment and support allowance’ system introduced by the Welfare Reform Act 2007. The definition of being ‘incapable of work’ has now been replaced with a definition of having ‘limited capability for work’.

The new definition, however, remains based on a set of regulations setting out similar scoring criteria to those applicable under the second part of the incapacity benefits system. The EAT’s judgment would therefore appear to be equally applicable to the new employment and support allowance system.

Adam Fuge is a partner at law firm Matthew Arnold & Baldwin.