By Jo Seery, Professional Support Lawyer
Background
Ms Carol McMahon was employed by AXA ICAS Ltd from 2000 until her dismissal in September 2013. Her contract included entitlement to benefits under a permanent health insurance (PHI) scheme, which would pay 75% of her salary if she was unable to work due to illness, increasing by 5% each year until she recovered or was 65 years old. Ms McMahon became eligible for PHI benefits in May 2011 but no payments were made. It later emerged that AXA had failed to secure the insurance policy intended to fund the scheme meaning that it would become liable for the PHI benefit under the terms of her contract.
Ms McMahon later sought to amend her claim for continuing unauthorised deductions from wages for each month on the basis she was contractually entitled to the PHI benefits from May 2011. In support of the amendment and relying on the case of Aspden v Webb Poultry and Meat Group (Holdings) Ltd 1996 it was argued that there was an implied term not to dismiss her because of an inability to work due to health problems while she remained entitled to the PHI benefits. The Employment Tribunal refused the amendment, holding that wages could not be claimed after dismissal. That decision was upheld by the Employment Appeal Tribunal. Ms McMahon appealed to the Inner House of the Court of Session.
Key Issue
- 27 (1) of the Employment Rights Act 1996 defines wages as “any sums payable to the worker in connection with employment” and includes any other “emolument referable to his employment, whether payable under the contract, or otherwise.”
The central issue was whether payments due under a contractual permanent health insurance scheme could continue to be claimed as “wages” under sections 13 and 27 ERA after the employee’s dismissal, where dismissal was said to breach an implied term preventing termination in circumstances that would defeat entitlement to PHI benefits.
The Court of Session upheld Ms McMahon’s appeal. It rejected the employers argument that the remedy for breach of the implied term was a claim for damages - which, in the employment tribunal is limited to £25,000.
It held that the Employment Tribunal and the EAT had erred in law by concluding that dismissal automatically brought the contractual obligation to pay PHI benefits to an end. The court found that PHI benefits were capable of constituting “wages” within the extended statutory definition in section 27 ERA, even after dismissal, because they did not depend on the employee continuing to provide work.
Drawing on authorities including Geys v Société Générale Aspden v Webbs Poultry, and USDAW v Tesco Stores, the court held that the obligation to pay PHI benefits could be analysed as collateral to the employment relationship on the basis that the insurance scheme was designed to operate when the employment came to an end on grounds of illness or injury. It was also of the view that there was an implied term preventing dismissal on grounds of incapacity which existed to protect the employee’s accrued rights under the scheme. As AXA could not rely on dismissal to defeat entitlement the scheme was designed to provide, the failure to pay benefits under the scheme amounted to an ongoing unauthorised deduction of wages.
The court allowed the amendment to proceed and remitted the case to the Employment Tribunal to determine whether Ms McMahon continued to meet the eligibility criteria and to quantify her claim. If the criteria are met, AXA remains under a continuing obligation to make the payments.
Why this matters
This is a significant and novel decision for employees relying on permanent health insurance schemes and for employers who provide them. The judgment confirms that contractual PHI benefits may survive dismissal and can be enforced as “wages” under the ERA.
While benefits under a PHI scheme are not wages in the ordinary sense they do fall within the extended definition set out in section 27 (see above). Furthermore, non-payment of benefits under a PHI scheme arising as a result of a breach of the implied term that the contract cannot be terminated in order to avoid entitlement to benefits under a PHI scheme are not limited to a common law claim for damages for breach of contract.
Where benefits are triggered by incapacity, it would be unjust for incapacity to be relied upon to terminate entitlement. The decision strengthens protections for workers facing long-term illness and reinforces the principle that employers should not benefit from their own wrongdoing.
The case is a reminder to carefully check the terms of entitlement to ill health benefit as entitlement may well survive the termination of employment.
