You could be being had here! Three months just happens to be the length of time you need to keep the sim-only going for them to keep their commission!
I know there was a loophole back in the day (that might still exist) where a handset-only upgrade can be completed from an o2 sim-only account, but to a standard o2 tarriff (e.g. 100 mins, unlimited texts, £20 per month for 24 months). You would never be able to keep the sim-only price-plan though!
This works/worked because of a weakness in the system where the upgrade had to be completed with o2 manually over the phone and this meant what the sales assistant told o2 to do (i.e. connect to the £20 tariff) didn't have to match what they actually put through on the till system (i.e. handset only upgrade). This means the till allows you to do the phone free (or at an amount discountable to free) because there is a better price on the handset only upgrade than there would be if you told the till you were upgrading the phone to that tariff. (The reason is that handset only upgrades tend to be pretty profitable as tariffs tend to get better over time, so if you keep your old tariff, you're probably not gonna be on a great deal - that's the logic anyway.) Make no mistakes though, the customer will end up with whatever the sales assistant tells o2 to connect - what they put through the till is completely irrelevant to the terms of the contract. It's simply a way of getting the P4U systems to let you sell the phone for less than you should.
The P4U staff member could potentially lie to the customer about the tariff as the contact that is printed out will actually state 'handset only upgrade', yet this is actually worthless! Since you have zero returns hope on an upgrade, I would be careful here as you can't really be sure what you're getting!
Phones 4U may or may not notice the mismatch at a later date when they query commission payments from o2, but in my experience staff never got pulled up for it!
So this might be what they are planning, or they might just be looking to make a quick buck on the simplicity sale, since if you cancelled it after 3 months when the upgrade 'didn't work', they still get the commission!