are PHI benefits wages for the purposes of bringing a claim for unlawful deduction of wages?

Permanent Health Insurance (PHI) is a very valuable benefit provided by employers for employees on long term sick leave. Essentially their insurer will pay a percentage of the employee’s base salary (normally between 50-75%) if an employee is materially and substantially incapacitated from carrying out their job for either a fixed period or until State Pension Age.  The employer has a duty to take all reasonable steps to procure the benefits for an eligible employee.  An employer also must not dismiss an employee for incapacity reasons if it is to deprive them of the benefit. This is an implied term of an employee’s contract as established by Aspden v Webbs Poultry and Meat Group (Holdings) Ltd [1996] IRLR 521.  

In McMahon v AXA ICAS Limited Ms McMahon claimed that she had suffered an unlawful deduction of wages pursuant to section 13 of the Employment Rights Act 1996, when the base salary used to calculate her PHI benefits had not increased in line with the PHI policy. Her employer contested that PHI benefits were not wages for the purposes of section 13. 

The Employment Appeal Tribunal (ET) disagreed and upheld the Employment Tribunal’s (ET) decision, holding that a PHI scheme gave rise to an obligation on the employer to make payments to the employee which, while her employment was ongoing, fell within the definition of wages that could be recovered by way of an unlawful deductions from wages claim. It also held that under an annual increase clause in the PHI policy, the employee was entitled to a 5% annual increase in benefits based on the previous year’s scheme salary, not on the base salary Ms McMahon when she was first admitted to the scheme which the ET had concluded.

However, the EAT disagreed with Ms McMahon that a claim for unlawful deduction of wages arose for the nine year period after her employment had been terminated. It held that PHI payments due from the employer after termination of employment could not be recovered in an unlawful deduction of wages claim, as only sums due under a subsisting employment contract fell within the definition of wages according to Delaney v Staples [1992] ICR 483.  She would need to have brought a breach of contract claim for the loss of the PHI benefits (which she had not done).

Ms McMahon also tried to argue that her base salary, here described as the scheme salary under the terms of the PHI scheme included overtime payments as well as pay rises that the employee would have earned had she continued working. The EAT disagreed and said that these were not included as it was the employee’s basic salary at the time of first claiming under the scheme and the policy that determined this. 

There was also a third appeal where the EAT also overturned the ET’s decision to strike out the employee’s disability discrimination claims, which related in large part to events that had occurred 12 or 13 years ago. The ET had held that, due to the passage of time, it was no longer possible to have a fair hearing of the claims. The EAT held that the tribunal should have allowed the employee to further detail the allegations before deciding whether they could still fairly be heard.  The case was therefore remitted back to the ET. 

You can find the EAT’s judgment here.

This blog was written by Anita Vadgama, Partner at didlaw.