An employee can bring a claim for unlawful deduction from wages in relation to unpaid post-termination PHI benefits

Permanent health insurance (PHI) or group income protection are common workplace benefits designed to protect a worker whose long-term illness prevents their return to work by replacing a proportion of their salary. The Inner House of the Scottish Court of Session (CSIH) has recently considered whether a worker can bring a claim for unlawful deduction from wages in relation to unpaid PHI benefits.

Following three years' ill-health absence, M was dismissed in September 2013 for incapacity. Before her dismissal, M brought a claim for unlawful deduction from wages in relation to the fact her employer had not paid her in respect of PHI benefits. After her dismissal, M applied to amend her existing pre-termination unlawful deduction from wages claim to include continuing unpaid post-termination PHI payments. The employment tribunal upheld M’s claim in respect of the pre-dismissal PHI payments, holding that the employer was itself liable to make the PHI payments because it had failed to secure an insurance policy to cover them. However, the tribunal refused to permit M to amend her claim to add the post-termination PHI payments – deciding that the employer was under no obligation to pay M ‘wages’ post-termination, and therefore any claim for post-termination missing PHI payments should be brought as a breach of contract claim as opposed to an unlawful deduction from wages claim. On appeal, the EAT upheld the tribunal’s refusal to amend M’s claim to add the post-termination PHI payments. M appealed to the CSIH.

The CSIH upheld M’s appeal. The Court began by taking note of the fact that the phrase ‘wages’ is defined broadly within the unlawful deduction from wages provisions to include ’any sums payable to the worker in connection with his employment’ and that this wide definition could include PHI payments. The Court then went on to hold that M’s entitlement to PHI benefits had survived her dismissal. By failing to secure insurance cover for the PHI benefits, the employer had essentially ’placed itself in the position of an insurer promising to pay certain benefits for so long as the eligibility conditions were met’. Since incapacity for work was one of the core eligibility conditions, it made little sense if that this alone allowed the employer to stop the PHI payments.

The Court explored several legal analyses that might justify this outcome. Firstly, the CSIH drew a distinction between the employment relationship and the contract of employment – noting that, whilst dismissal terminates the employment relationship, some contractual obligations can survive the termination. The PHI scheme obligations were ’collateral to the employment relationship’ (ie running outside the main written contractual agreement and did not depend on the continuation of the employment relationship). Absent any repudiation by the employee (such as the employee feigning incapacity), the qualifying illness ’triggers the [employer’s] obligations’. Therefore, the amendment M proposed to her claim (to add the missing post-termination PHI payments) did not amount to a damages claim – rather, it was ’a legitimate attempt to enforce the PHI benefits promised in the contract’. These benefits were not dependent on M continuing to provide work for her ex-employer.

Alternatively, the Court held that another route to the same outcome would be to imply a term into the contract to the effect that the employer ’could not terminate [M’s] contract for the purpose of depriving M of the PHI benefits’. This would make the employers attempt to do so ’invalid’ and a ‘nullity’ and meant the termination ’had no impact on [its] contractual obligation to honour the PHI payments’. The Court concluded that the two approaches explored above were not mutually exclusive and has sent the case back to the employment tribunal with a direction that M’s amendment should be allowed.

In practical terms, the decision means that PHI payments can possibly amount to ‘wages’ even following the termination of the employment and, therefore, the employee can pursue an unlawful deduction from wages claim both pre- and post-termination if they do not receive the PHI benefits.

McMahon v AXA ICAS Ltd (now named AXA Health Services Ltd) [2026] CSIH 19

Important note: The Inner House of the Scottish Court of Session is the highest Scottish appeal court (equivalent to the Court of Appeal); its decisions are not strictly binding on the Court of Appeal, but they are of strong persuasive value and will usually be followed by lower English courts and tribunals.

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