Unlawful deductions and PHI benefits: EAT clarifies limits of claims
A recent Employment Appeal Tribunal (EAT) decision has clarified the extent to which Permanent Health Insurance (PHI) benefits can be claimed under the unlawful deductions from wages regime.
How does PHI work?
PHI schemes provide income replacement for employees unable to work due to illness or incapacity. These benefits are usually calculated based on an employee’s salary at the time of becoming eligible under the scheme and may include annual increases. Where PHI is in place during employment, there is an implied term that prevents an employer from dismissing an employee on long-term sickness absence simply to avoid liability for PHI payments. Unless the employee has engaged in repudiatory conduct that would justify dismissal, terminating employment in such circumstances could give rise to a wrongful dismissal claim.
What were the facts of the case?
The case of McMahon v AXA ICAS Ltd involved an employee who had been on long-term sick leave and was entitled to receive PHI benefits under her employer’s scheme. However, due to an administrative error, she was omitted from the policy, and no payments were made to her. Her employment was ultimately terminated due to her incapacity.
The employee initially brought an unlawful deduction from wages claim to recover PHI benefits for the period during which she remained employed. After her dismissal, she attempted to extend her claim to include benefits she argued were due after her employment had ended. She also brought a separate disability discrimination claim, which was later struck out by the tribunal.
A key issue in this case was whether PHI benefits which would have been due after termination had the employment continued, could be classified as wages under employment law.
Decision and key findings
The EAT upheld the tribunal’s finding that PHI benefits due while the employee remained in employment could be classified as wages under the unlawful deductions framework. This confirmed that an employer’s obligation to pay PHI benefits, where contractually agreed, forms part of an employee’s wages under a subsisting contract of employment.
However, PHI benefits that would otherwise have been paid after termination, could not be recovered as wages. The EAT reaffirmed that wages must arise under an ongoing employment contract, and once employment has ended, PHI payments fall outside the scope of the unlawful deductions provisions. Instead, any claim for PHI benefits after termination would need to be pursued as a breach of contract claim rather than through the unlawful deductions regime.
Best practice for employers
To avoid disputes, employers should ensure that PHI entitlements are clearly set out in employment contracts, including whether benefits depend on insurer approval and if the employer has a direct obligation to pay.
Defining the scope of PHI entitlements, salary calculations, and post-termination provisions can help avoid disputes. Consistency across contracts, policy documents, and handbooks is essential in mitigating legal risks. This case highlights the importance of careful contractual drafting to protect both employers and employees.