Key takeaways
Unpaid PHI benefits may count as wages
Workers could claim under unlawful deduction provisions
Clear contract wording prevents costly disputes
Precise drafting of PHI terms reduces legal exposure.
Define insurer obligations upfront in agreements
Transparency on liability helps avoid unexpected claims.
Permanent health insurance (PHI) or group income protection are common workplace benefits designed to replace a proportion of a worker’s salary if they have a long-term illness and cannot return to work. The EAT has recently considered whether a worker can bring a claim for unlawful deduction from wages in relation to unpaid PHI benefits. The case is a reminder to employers of the importance of making sure any contracts, handbooks or other documents relating to PHI cover are clearly drafted and that PHI benefits are conditional upon and only payable if the underlying insurer accepts a claim.
Following 3 years’ ill-health absence, M was dismissed in September 2013. Before she was dismissed, 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 she claimed she was contractually entitled to. As part of that claim, M argued that these unpaid PHI payments should include overtime, salary increases and a 5% annual uplift. After her dismissal, M applied to amend her existing pre-termination claim to include continuing unpaid post-termination PHI payments, but the employment tribunal rejected her application to amend. The tribunal held:
M had a contractual entitlement to benefits under the PHI scheme.
The terms of M’s PHI entitlement were contained in:
Her offer of employment, which referred to an entitlement to PHI cover following 6 months’ probation;
The very brief details of the PHI cover in the staff handbook (which said it formed part of her employment contract); and
A two-page document she had been given by HR after her probation ended which gave further details of the PHI scheme. This confirmed that after 26-weeks of continuous incapacity she would be entitled to a proportion of her normal earnings based on 75% of her scheme salary increased by 5% annually.
None of these documents said that M’s PHI entitlement was conditional on an insurer accepting liability to make PHI payments. Neither ‘normal earnings’ nor ‘scheme salary’ were defined.
Interpreting those documents, ‘normal earnings’ meant pay for basic hours (excluding overtime/salary increases), ‘scheme salary’ meant the initial sum due when the PHI entitlement commenced, and it was to this ‘scheme salary’ that the 5% annual uplift should be applied each year.
The PHI payments M was entitled to qualified as ‘wages’, so M was entitled to claim unlawful deduction from wages in relation to the unpaid PHI payments.
Both parties cross-appealed to the EAT. The EAT partially upheld M’s appeal and held:
The tribunal had not erred in concluding that the employer was obliged to make PHI payments to M and that, whilst her employment continued, these unpaid PHI payments fell within the definition of ‘wages’ for the purposes of her ability to bring an unlawful deductions from wages claim.
The unpaid PHI payments should be calculated on the basis of M’s basic salary (excluding overtime/salary increases).
However, the tribunal had erred in relation to the 5% annual increase; the correct analysis was that the 5% increase should be applied to the amount of PHI benefit being paid at the end of each year (rather than in the first year of entitlement).
The tribunal had not erred when it refused M’s application to amend her unlawful deduction from wages claim to include unpaid PHI payments arising post-termination. The definition of ‘wages’ in the relevant legislation is confined to sums which fell due during the subsistence of the employment relationship; it did therefore not extend to the post-termination PHI payments. M’s remedy for any non-payment of PHI payments that arose post-termination was to sue in the civil courts for damages for breach of contract.
We often receive queries relating to entitlement to PHI benefits, so we strongly recommend that employers:
Ensure any offer letters, contracts, handbooks or other documents relating to an employee’s entitlement to PHI cover are very clearly drafted, so as to avoid any room for misinterpretation or uncertainty.
Any contractual documentation should make it clear:
that any entitlement to PHI benefits is conditional upon the underlying insurer accepting the employee’s PHI claim;
what parts of an employee’s remuneration are included/excluded in any calculations;
whether or not salary increases are accounted for and how any annual uplifts are applied;
what happens to the employee’s entitlement to annual leave and other benefits (such as life cover and company car) whilst they are in receipt of PHI benefits;
when PHI cover ends (if this is linked to state pension age, this should usually track any increases to state pension age).
