In this case, the EAT upheld an employment tribunal's decision that an employee could recover payments due under her employer's PHI scheme via an unlawful deductions claim. The EAT also held that the tribunal had been wrong to strike out the employee's disability discrimination claim on the basis that a fair hearing was impossible.
Background
Permanent health insurance (PHI) schemes provide employees on long-term sickness absence with continued income. Entitlement is usually conditional on continued employment, and case law has established an implied term preventing employers from dismissing absent employees for capability where they are covered by a PHI scheme. This is referred to as the Aspden implied term, after the case in which it was established.
Facts
Ms McMahon started employment with AXA ICAS Ltd (AI) in January 2000. She went off sick in September 2010 and did not return to work before her dismissal in September 2013. One of the benefits provided under her contract was access to a PHI scheme. However, due to human error, no claim was made for her and she did not receive any PHI payments. While still employed, Ms McMahon brought an unlawful deductions from wages claim for the PHI payments. She also brought a disability discrimination claim, which was poorly particularised, but which related to acts that occurred before her dismissal.
Ms McMahon had also brought other claims against AI which she pursued all the way to the European Court of Human Rights. Her unlawful deductions and disability discrimination claims were delayed during that time.
When the employment tribunal eventually considered Ms McMahon's unlawful deductions claim, it held that the way the PHI scheme was described in the contractual documentation gave rise to an obligation for AI to make payments to Ms McMahon which, during her employment, fell within the statutory definition of "wages" and could therefore be recovered via an unlawful deductions claim. The tribunal held that the PHI payments should be based on Ms McMahon's basic salary, and should not take account of overtime pay, or salary increases that may have been awarded had Ms McMahon not been off sick. It also held that a 5% annual uplift provided for in the scheme documentation should be fixed at 5% of the initial PHI payment amount.
In 2022, Ms McMahon had applied to amend her unlawful deductions claim to include PHI payments she claimed were due since she had submitted her original claim, including payments for the nine years after her employment ended. The tribunal refused the amendment on the basis that it had little prospect of success.
As for Ms McMahon's disability discrimination claim, the tribunal granted AI's application for it to be struck out on the basis that, due to the passage of time, a fair hearing would not be possible. As the events in question had taken place some 13 years ago, witnesses' memories would inevitably have diminished, and AI's ability to defend the claim would therefore be prejudiced.
Ms McMahon appealed to the EAT in relation to the calculation of her PHI payments, the rejection of her application to amend her unlawful deductions claim, and the strike out of her disability discrimination claim. AI cross appealed against the decision that it was contractually obliged to pay the PHI payments.
EAT decision
The EAT dismissed AI's cross appeal, holding that although the contract referred to the existence of an insurer, it did not limit AI's liability to procuring and maintaining a policy of insurance, or state that payments would be limited to sums paid by the insurer. Rather, the documentation referred to PHI benefit being paid monthly "in the form of salary" once eligibility was established, and AI's contractual obligation was to provide payments under the terms of the PHI scheme.
However, the EAT agreed with the tribunal that the PHI payments should not include overtime pay. Ms McMahon's contract distinguished between "salary" (for normal hours) and "additional payments" (for overtime). The PHI scheme provided for payment of "a proportion of salary", which meant basic salary only. Nor should the PHI payments take into account salary increases Ms McMahon may have received had she been working, as there was too much uncertainty over what those increases would have been. The one calculation point on which Ms McMahon succeeded concerned the 5% uplift. The EAT accepted that this should have been assessed as 5% on the amount actually payable at the end of each year, to preserve the value of the PHI payments in real terms.
The EAT dismissed Ms McMahon's appeal against the refusal of her application to amend her claim. Ms McMahon had argued that as her dismissal had been in breach of the Aspden implied term, its effects were "negated" so she remained entitled to ongoing PHI payments, but the EAT disagreed. Even if the Aspden implied term had been breached, this did not negate the effects of the dismissal. The contractual documentation limited PHI payments to current employees, and the term "wages" in an unlawful deductions claim could only relate to payments which had fallen due under a subsisting employment contract, not those which only became payable after the contract had ended. The only way Ms McMahon could have sought to recover the PHI payments she lost out on as a result of her dismissal would have been via a contract claim for breach of the Aspden implied term.
Finally, the EAT upheld Ms McMahon's appeal against the strike out of her disability discrimination claim. Although witnesses' memories would have faded over time, it was not possible to identify whether a fair hearing remained possible without first understanding what Ms McMahon's case was, who AI would need as witnesses, what their recollection of key events was, and what documentary and other evidence was still available. The tribunal should not have determined the strike out application without first seeking answers to those questions.
What this does mean for employers?
This decision provides a cautionary reminder for employers of the importance of careful contractual drafting to make clear that employees will only be entitled to payment of PHI benefits if their claim is accepted by the insurer, and that payments will be limited to amounts the employer actually receives from the insurer.
Employers could also consider, if they wish to do so, including express contractual wording permitting them to dismiss for capability even where an employee is entitled to PHI benefits, in order to avoid the effects of the Aspden implied term (albeit that there is as yet no case law confirming that such wording would be enforceable).Taking this step would be something to discuss with your usual DAC Beachcroft contact.
The decision also highlights the difficulty of getting a discrimination claim struck out – even where it is based on events from many years ago. In such cases, the tribunal must assess whether the extent to which the quality of evidence has been diminished by the passage of time is so severe that a fair trial is no longer possible.
