UK: Employee Benefits: Unlawful Deduction from Wages

Authors:  Stephen Miller, Corinna Harris, Sophie Jackson, & Charlotte Stern

Ms McMahon’s employment began in January 2000. Her employment contract included a PHI scheme under which, after 26 weeks’ absence due to ill health, she would receive 75% of her salary until recovery or age 65. Although the contract stated that these benefits would be secured by an insurance policy funded by the employer, this was not put in place. Ms McMahon became eligible for PHI benefits in May 2011 but received no payments and was dismissed in September 2013 on the grounds of long‑term incapacity.

Ms McMahon brought a claim for unauthorised deductions from wages, initially seeking payment of PHI benefits for the period prior to her dismissal. She later sought to extend the claim to cover PHI payments following dismissal, arguing that an implied term prevented her employer from dismissing her while she was incapacitated, and her dismissal did not remove her entitlement to PHI benefits. The Employment Tribunal allowed the claim in relation to the pre‑dismissal loss but refused to permit the claim for post‑dismissal loss to proceed.  The EAT upheld that decision, concluding that the post‑dismissal sums were not “wages” and that her remedy lay in breach of contract.

However, the higher appeal court in Scotland, the Court of Session, allowed Ms McMahon’s appeal. Although her employer had failed to take out the PHI policy, this did not extinguish Ms McMahon’s rights, and it was liable to make the payments.  It held that PHI payments can fall within the legal definition of “wages” and that her claim for post-dismissal losses was not restricted. The Court also accepted that her employer’s liability to pay PHI benefits could survive dismissal, a conclusion which could be supported in two different ways (either because it was a collateral contractual obligation or because an implied term prevented dismissal for the purpose of avoiding PHI liability). The case was returned to the Tribunal.

Key Action Points for Human Resources and In-house Counsel

Employers should carefully review PHI arrangements to ensure promised benefits are fully covered by insurance and properly implemented. Where they are not, employers may be exposed to ongoing payment obligations even after employment ends and employers should be cautious about dismissing employees simply to avoid accruing further liability.