A recent Employment Appeal Tribunal (EAT) decision has clarified the extent to which Permanent Health Insurance (PHI) benefits can be claimed under the unlawful deductions from wages regime.

How does PHI work?

PHI schemes provide income replacement for employees unable to work due to illness or incapacity. These benefits are usually calculated based on an employee’s salary at the time of becoming eligible under the scheme and may include annual increases. Where PHI is in place during employment, there is an implied term that prevents an employer from dismissing an employee on long-term sickness absence simply to avoid liability for PHI payments. Unless the employee has engaged in repudiatory conduct that would justify dismissal, terminating employment in such circumstances could give rise to a wrongful dismissal claim.

What were the facts of the case?

The case of McMahon v AXA ICAS Ltd involved an employee who had been on long-term sick leave and was entitled to receive PHI benefits under her employer’s scheme. However, due to an administrative error, she was omitted from the policy, and no payments were made to her. Her employment was ultimately terminated due to her incapacity.

The employee initially brought an unlawful deduction from wages claim to recover PHI benefits for the period during which she remained employed. After her dismissal, she attempted to extend her claim to include benefits she argued were due after her employment had ended. She also brought a...

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