Payments due under a PHI scheme in an employment contract could continue to be payable as...
PHI payments and termination of employment
Payments due under a PHI scheme in an employment contract could continue to be payable as ‘wages’ after the employee's dismissal.
Background
Ms McMahon began working for AXA in 2000. In September 2013 she was dismissed because a long-term illness was preventing her from working.
Ms McMahon’s contract of employment included entitlement to benefits under a PHI scheme after 26 weeks’ incapacity. It provided that if she remained unable to work after 26 weeks of absence caused by illness or injury, she would be paid 75% of her normal earnings less state benefit, increasing by 5% each year until she recovered or reached 65 years old. The benefits were supposed to be secured by a policy with an insurance company effected by and paid for by AXA. The promised benefits were not in fact secured by an insurance policy due to an administrative error.
Some years after her dismissal she brought tribunal proceedings arguing that she was entitled to PHI payments from the date of her dismissal up to the present day. This was on the basis that her contract contained an implied term preventing AXA from dismissing her while she was off sick, and that this ‘negated’ her dismissal, leaving her entitlement to payments under the PHI scheme unaffected.
A tribunal upheld her claim for PHI payments before dismissal, but it refused to entertain her claim for post-dismissal payments. Such payments did not constitute ‘wages’ for the purposes of an unlawful deduction from wages claim. She appealed.
The EAT held that PHI benefits that would otherwise have been paid after termination, could not be recovered as wages. ‘Wages’ must arise under an ongoing employment contract, and once employment has ended, PHI payments fall outside the scope of the unlawful deduction 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 deduction regime. Ms McMahon appealed to the Inner House of the Court of Session (the Scottish equivalent of the English Court of Appeal).
Court of Session decision
Her appeal was allowed.
The key issue was whether AXA could rely on the dismissal as terminating its obligation to pay the PHI benefits.
The court noted that s. 27 of the Employment Rights Act defines ‘wages’ broadly to include sums payable in connection with employment, which could include PHI payments. AXA had placed itself in the position of an insurer promising to pay certain benefits for so long as Ms McMahon met the eligibility conditions, and that since incapacity for work was one of those conditions, it made little sense if that alone allowed the payments to stop.
The court noted that a number of legal analyses supported its stance. PHI benefits could be seen as collateral obligations under the contract of employment. Alternatively, applying the Supreme Court’s decision in Tesco Stores Ltd v USDAW, an implied term may restrict an employer’s right to dismiss where doing so would defeat accrued or accruing contractual benefits.
Comment
This decision confirms that PHI entitlements may survive dismissal and be enforceable via unlawful deductions claims, not merely as damages.
Various cases have held that there is an implied term prohibiting an employer from dismissing an employee without good cause where the effect would be to deprive the individual of their rights under a PHI or long-term sickness scheme, see for example Awan v ICTS UK Ltd.
Employers should include very clear wording in employment contracts permitting them to dismiss in the event of long-term sickness absence, notwithstanding any entitlement to PHI benefits.