In this case, the Court of Session held that an employee could pursue a claim against her employer for payment under a permanent health insurance (PHI) scheme that she alleged she was entitled to for a period after her dismissal for incapacity.
Background
PHI schemes provide continued income for employees on long-term sickness absence. Entitlement is usually conditional on continued employment. The so-called "Aspden implied term" (named for the case in which it was established) prevents employers from dismissing employees for capability where they are entitled to benefits under a PHI scheme.
"Wages" for the purposes of an unlawful deductions from wages claim are broadly defined in section 27 of the Employment Rights Act 1996, and include any "sums payable to the worker in connection with" and "emoluments referable to" the worker's employment. However, case law has established that "wages" for these purposes are limited to payments made in connection with the provision of services during employment. A payment in lieu of notice (PILON), for example, has been held not to amount to wages because it related to a period after termination.
Facts
Ms McMahon started employment with AXA ICAS Ltd (AI) in January 2000. She went off sick in September 2010 and was eventually dismissed for incapacity in September 2013. Her contractual benefits included access to a PHI scheme. However, due to human error, no claim was made for her and she did not receive any PHI payments.
While still employed, Ms McMahon brought an unlawful deductions from wages claim for the PHI payments. Consideration of this claim was delayed for some years while Ms McMahon pursued other claims against AI.
When the employment tribunal eventually considered Ms McMahon's unlawful deductions claim, it held that AI was under an obligation to make payments to her due to the way the PHI scheme was described in the contractual documentation. During Ms McMahon's employment, such payments could be recovered via an unlawful deductions claim as they fell within the statutory definition of "wages". The tribunal also made findings as to the amount of the payments due.
In 2022, Ms McMahon had applied to amend her unlawful deductions claim to include PHI payments she claimed were due since she had submitted her original claim, including payments for the years after her employment ended. This was on the basis that Ms McMahon's dismissal was in breach of an implied term preventing AI from dismissing her for incapacity while she was entitled to PHI payments. The tribunal refused the amendment on the basis that it had little prospect of success.
On appeal, the EAT allowed Ms McMahon's appeal against one aspect of the tribunal's decision on the calculation of her PHI payments. However, it dismissed her appeal against the refusal of her application to amend her claim. (See our report on the EAT's decision here.)
Court of Session decision
Ms McMahon appealed successfully to the Inner House of the Court of Session, which remitted the case to the employment tribunal, directing that Ms McMahon's amendment should be allowed.
The court held that the existing case law on the definition of wages could be distinguished. The legislation that had been at issue in that case could not be made to work if a PILON was included within the definition. No such difficulty arises in respect of payments under a PHI scheme, which are not dependent on the worker providing services to the employer and can be considered sums payable in connection with, or emoluments referable to, a worker's employment, in accordance with the broad definition in section 27.
The court considered that AI had placed itself in the position of an insurer promising to pay certain benefits for so long as Ms McMahon met the eligibility conditions. Since incapacity for work was one of those conditions, it made little sense if that alone allowed the payments to stop.
There were various legal analyses which could support Ms McMahon's position that AI should continue to be liable for PHI payments post-dismissal. One was that the obligation to provide PHI benefits was collateral to the employment contract, and therefore not dependent on the employment relationship continuing. Another was to apply the Supreme Court's decision in Tesco Stores Ltd v USDAW (which we reported on here), and hold that there was an implied term that AI could not terminate the contract for the purpose of depriving Ms McMahon of the PHI benefits. Since AI had no power to dismiss Ms McMahon for incapacity, its attempt to do so was a nullity and had no impact on the contractual obligation to honour the PHI payments.
In the court's view, the collateral obligation analysis had force, because it reflected the purpose of what is effectively an insurance scheme designed to operate when the employment relationship is interrupted by illness. However, the approach based on Tesco Stores Ltd v USDAW may be more in line with the wording of the unlawful deductions provisions of the ERA 1996, which refers to deductions "from wages of a worker employed by (an employer)". In any event, the court noted that the two approaches were not mutually exclusive.
What does this mean for employers?
A more obvious route for Ms McMahon might have been to claim damages on the basis that her dismissal, in breach of the Aspden implied term, was wrongful. However, this would have been unattractive since breach of contract claims in the employment tribunals are limited to £25,000. In addition, as the court acknowledged, a claim for damages would have required Ms McMahon to quantify her loss, and involved speculation as to the future and the duration of her inability to work. In the circumstances, the court considered it more "in tune with the justice of the case" to prevent AI from avoiding its contractual obligations in the first place.
The facts of this case are relatively unusual, but they do provide a reminder to employers of the importance of ensuring that appropriate policies for any PHI and other insurance backed benefits that are promised in their employment contracts are actually in place. Employers should also ensure that their contracts are carefully drafted so as to make clear that:
- The PHI scheme is provided as a discretionary benefit that the employer may withdraw or amend at any time
- Entitlement to PHI payments is subject to the insurer accepting an employee's claim under the scheme
- Any payments will be limited to amounts received from the insurer
Employers may also wish to include an express term stating that the employer may dismiss for incapacity even where an employee is entitled to PHI benefits, although it is unclear whether such a term would be enforceable in light of current case law.
Case: McMahon v AXA ICAS Ltd
