PHI Claims After Dismissal: A Landmark Ruling

Permanent Health Insurance 'PHI' claims feature in a recent judgment from Scotland's Court of Session Inner House, (equivalent to the Court of Appeal), it has now been established that an employee who has been dismissed can bring a claim for 'unlawful deduction from wages' for any PHI benefits due that are not paid, as per McMahon v AXA ICAS Limited.

The judgment is important as it means that where employees are entitled to PHI benefits (income protection on ill-health dismissal or absence from work), and the employer doesn't pay, the employee can bring a claim in the Employment Tribunals for unpaid wages (despite usually having been dismissed) despite on the face of it, PHI benefits after dismissal are not 'wages'. The Court described a duty to pay PHI (when due) as a 'collateral obligation' under the contract of employment and the obligation continued despite the employer terminating the contract.

In a deduction from wages claim, there is no duty on the employee to mitigate losses and offset new earnings, unlike a breach of contract claim. It also means that employees can use the relatively informal and 'costs-free' Employment Tribunals to bring 'recurring' deductions claims for unpaid PHI benefits rather than bring a breach of contract claim in the civil courts, which would likely incur significant legal costs for both sides.

PHI claims are relatively rare, as employers seem to be reluctant to incur the significant costs (here 75% of normal pay minus State benefits to age 65) and risks involved in PHI claims, which can include the employee alleging that a dismissal that prevents the employee claiming PHI benefits is itself a breach of contract if the employee needs to remain employed to claim the benefit, which can make the employer liable instead of any insurer for many years salary. In this case the employer didn't insure itself against the costs of the claim, due to an oversight.

Key Takeaways for Employers and Employees

The lesson for employers is: Make sure, if you offer PHI, that insurance is in place and if dismissing an employee on ill-health (capability) grounds, check that the policy will remain effective.

For employees entitled to PHI benefits, it will be cheaper (but not necessarily quicker) to claim in the Employment Tribunals than in the civil courts, and you should be an award for the entire value of the claim.

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