Court of Session confirms that PHI benefits may remain payable after dismissal and be recoverable as wages

Background

In the case of McMahon v AXA ICAS Ltd, the claimant’s contract entitled her to permanent health insurance (PHI) benefits worth 75% of salary after 26 weeks’ sickness absence, continuing until recovery or retirement. Although the employer was required to insure this benefit, it failed to do so.

The claimant became eligible for PHI payments but received none. She was subsequently dismissed for long-term incapacity. She brought a claim for unauthorised deductions from wages in respect of unpaid PHI benefits prior to dismissal and later sought to extend that claim to cover the post-dismissal period.

The Employment Tribunal allowed the pre-dismissal claim but refused the amendment relating to post-dismissal losses. It considered that any entitlement after dismissal amounted to damages for breach of contract rather than “wages”. The EAT upheld that approach.

Court of Session decision

The Scottish Court of Session has now allowed the appeal, confirming that PHI payments falling due after dismissal can, in principle, be pursued as unlawful deductions from wages.

The Court took a broad view of “wages” under the legislation, confirming that sums payable in connection with employment can include PHI benefits. It rejected the argument that earlier authority on payments in lieu of notice prevented such claims.

On whether entitlement survives dismissal, the Court identified two possible approaches. First, the obligation to provide PHI benefits may be a separate contractual obligation that continues independently of employment. Secondly, there may be an implied term preventing dismissal where the purpose is to avoid liability for PHI benefits.

The Court considered the first approach particularly persuasive, noting that PHI schemes are designed to provide income protection during periods of illness when normal working arrangements are disrupted. The case was remitted to the Tribunal, with a direction that the amendment be allowed.

Learning points for employers

This decision highlights the significant risk exposure where PHI arrangements are not properly implemented or managed. Employers should ensure that any promised insurance cover is actually in place and aligns with the contractual wording. It is also sensible to ensure that the contract reflects that the PHI benefit will only be paid out insofar as it is covered by the insurer, so that if the insurer were to stop payments, the employer would not then be obliged to step in under the contract.

For more information or advice, please get in touch with Sharmin Chowdhury in our Employment team.