Claiming PHI benefits post-dismissal

In McMahon v AXA ICAS Ltd [2026] CSIH 19, the Inner House of the Court of Session considered whether payments due under a contractual permanent health insurance (PHI) benefit could continue to amount to ‘wages’ for the purposes of an unlawful deduction from wages claim, even after an employee had been dismissed due to long-term ill health. The Court held that, on the particular facts, the employee should be permitted to pursue such a claim and remitted the case back to the employment tribunal. 

McMahon v AXA ICAS Ltd [2026] CSIH 19 

Facts of the case 

Ms McMahon was employed by AXA ICAS Ltd (AXA). She commenced long-term sick leave in September 2010 and did not return to work. AXA operated a PHI scheme, under which qualifying employees were entitled to receive 75% of their salary (less state benefits), increasing annually, until recovery or normal retirement age. 

Due to an administrative error, Ms McMahon had not been enrolled in AXA’s PHI policy, and no PHI payments were made during her sickness absence. In June 2013, she brought an unlawful deduction from wages claim in respect of the unpaid PHI benefits covering the period of her sickness absence up to that date. 

In September 2013, AXA dismissed Ms McMahon by reason of incapacity. Several years later, she applied to amend her tribunal claim to include PHI payments she claimed were due after her dismissal. She argued that there was an implied contractual term preventing dismissal during sickness absence in circumstances that would deprive her of PHI benefits, with the result that her dismissal was ineffective and her contractual entitlement to PHI payments continued. 

Employment tribunal and EAT decisions 

The employment tribunal found that the PHI scheme formed part of Ms McMahon’s contractual entitlement and rejected AXA’s argument that its only obligation was to arrange insurance cover. The tribunal upheld her unlawful deduction from wages claim in respect of PHI payments due before dismissal. 

However, the tribunal refused to allow the proposed amendment extending the claim beyond the dismissal date. It concluded that post‑termination PHI payments could not amount to ‘wages’ for the purposes of an unlawful deduction from wages claim. Any entitlement after dismissal could only be claimed as damages for breach of contract. 

The Employment Appeal Tribunal upheld that decision. It relied on the principle in Delaney v Staples [1992] ICR 483, concluding that wages must fall due under a subsisting employment contract and that sums claimed after termination were not recoverable through the unlawful deduction from wages regime. 

Court of Session decision 

The Inner House allowed Ms McMahon’s appeal. Lord Malcolm, giving the leading judgment, held that the tribunal had taken too narrow an approach to the meaning of ‘wages’. 

The Court found that PHI payments could fall within the extended statutory definition of wages as sums payable ‘in connection with’ or ‘emoluments referable to’ employment, even where the entitlement continued after dismissal. The decision in Delaney was distinguishable, as it concerned a payment in lieu of notice which arose solely because of termination, rather than an ongoing entitlement linked to the employment relationship. 

The Court identified two alternative, but not mutually exclusive, legal bases on which the PHI entitlement could survive dismissal. First, the obligation to provide PHI benefits could be characterised as a collateral obligation, independent of the subsisting employment relationship. Secondly, applying established authority on PHI schemes, an implied term could arise preventing dismissal for incapacity where dismissal would deprive the employee of PHI benefits, rendering the dismissal ineffective for these purposes. 

On either analysis, the Court concluded that Ms McMahon should be permitted to pursue her amended unlawful deduction from wages claim. The case was remitted to the employment tribunal with a direction that the amendment be allowed. 

The Birketts view 

This is an important decision for employers operating PHI arrangements. It confirms that, in certain circumstances, PHI benefits may continue to be treated as ‘wages’ for the purposes of the unlawful deduction from wages regime, even after dismissal. This potentially allows employees to avoid the financial cap and limitation issues that apply to breach of contract claims in the employment tribunal. 

Although the judgment is from the Scottish courts and is therefore not binding on employment tribunals in England and Wales, it is likely to be highly persuasive. The Court’s analysis of the definition of wages in the Employment Rights Act 1996, and its reliance on UK Supreme Court authority, is likely to be followed unless and until there is contrary appellate authority. 

The facts in this case were unusual, particularly the employer’s failure to enrol the employee in the PHI scheme. However, the decision underlines the risks of dismissing employees who are, or may be, entitled to PHI benefits. Employers should carefully review the terms of their contracts and benefit documentation to ensure that responsibility for payment is clearly limited to amounts received from the insurer and that entitlement is expressly conditional on insurer acceptance. 

Employers should also take care when considering dismissal for long‑term incapacity where PHI benefits apply. As this case demonstrates, dismissal may not always bring PHI obligations to an end and may expose employers to significant ongoing liability through the unlawful deduction from wages regime.