Employee dismissed on health grounds can amend claim to pursue Permanent Health Insurance Payments past termination date

About this case:

• Citation:
  [2026] CSIH 19
• Judgment:
  External link
• Court:
  Court of Session Inner House
• Judge:
  Lord Malcolm

Carol McMahon had made a claim for unpaid wages against her former employer AXA ICAS Ltd, now named AXA Health Services Ltd, after she was dismissed because a long-term illness prevented her from working. She sought to establish that payments due to her under a permanent health insurance scheme set out in her contract of employment were “wages” in terms of sections 13 and 27 of the Employment Rights Act 1996, and the effect of the scheme “negated” her dismissal from employment in September 2013.

The appeal was heard by Lord Malcolm, Lord Clark, and Lord Ericht, with the appellant appearing as a party litigant and the respondent represented by Hay KC.

Implied term of contract

In January 2000 the appellant began her employment with the respondent, and before her dismissal in September 2013 she raised a claim for unpaid wages for the period May 2011 to June 2013. Under her contract, if the appellant remained unable to work after 26 weeks of absence caused by illness or injury, she would be paid 75 per cent of her normal earnings less state benefit, increasing by five per cent each year until either she recovered or turned 65 years old. These benefits were secured by a policy with an insurance company effected and paid for by the respondent, referred to as a Permanent Health Insurance scheme.

It was the appellant’s case that she became eligible to receive PHI benefits in May 2011 but never received any payments under the scheme. Before the ET, a witness for AXA stated that the promised benefits were not secured by an insurance policy due to an administrative error. The respondent’s case was that its only obligation was to arrange and pay for a suitable PHI policy and a failure to do so was not capable of triggering a deduction from wages claim.

The ET in July 2022 held that so long as the appellant was an employee and unable to work, the respondent was contractually obliged to make the scheme payments, and failure to make those payments amounted to an unlawful deduction for the time she was in employment. However, in March 2022 the ET was asked to allow an amendment which would introduce a continuing unauthorised deduction from wages claim for each month from May 2011 up to the present day. This was based on a contention that there was an implied term in her contract of employment to the effect that, while entitled to the PHI benefits, the appellant would not be dismissed because of an inability to work.

In refusing the amendment, a decision upheld by the Employment Appeal Tribunal, it was held that the term “wages” in that part of the ERA was confined to sums that fell due under a subsisting contract of employment. Assuming that the dismissal was indeed in breach of the implied term, the appropriate remedy was damages for breach of contract. Permission to appeal to the Inner House was granted based on the novel issues raised by the claim.

In effect an insurance scheme

Delivering the opinion of the court, Lord Malcolm noted: “Sprinkled throughout the narrative so far is the notion that the employment relationship and the contract of employment are two different things. This was the focus of an article entitled ‘Employment contracts, conditions, and the relationship of employment’ (Law Quarterly Review 2024), author Professor Jordan English. It was acknowledged that the proposition is controversial. However, we have found the analysis to the effect that the two concepts are separate and distinct to be persuasive and of assistance in the circumstances of this case.”

He explained further: “The author argues that termination of the employment relationship ends the core obligation of the payment of wages (in the ordinary sense) in return for work done by the employee. Generally, the court will not order specific performance of the employment relationship. The author cites a passage in the judgment of Brightman LJ in Gunton v Richmond-upon-Thames LBC (1981). In summary his Lordship stated that if a servant is wrongfully dismissed, plainly he is no longer his master’s servant and can no longer sue for wages, only for damages. But it does not follow that the contract of service has terminated. Only the status or relationship has ended.”

Considering whether the appellant’s dismissal had been negated, Lord Malcolm said: “While we may not couch the notion in those exact terms, we consider that the general idea has been too readily dismissed. Essentially, AXA placed itself in the position of an insurer promising to pay certain benefits for so long as the eligibility conditions were met by Ms McMahon. Since incapacity for work was one of those conditions, it makes little sense if that alone allowed the payments to stop.”

He added: “Given the content of the implied term, AXA had no power to dismiss Ms McMahon because of her incapacity. The attempt to do so was invalid; in effect it was a nullity. As it is sometimes put, it was ‘writ in water’ and had no impact on the contractual obligation to honour the PHI payments. We see force in the collateral obligation analysis, primarily on the view that it reflects the notion of what is in effect an insurance scheme designed to operate when the employment relationship is ruptured, or at least interrupted, by illness or injury.”

Lord Malcolm concluded on disposal: “Standing our finding that the dominant reason for refusal of the amendment was erroneous in law, we shall uphold the appeal and remit the matter to the ET under a direction that the amendment should be allowed. Given the scope of our decision, this only leaves a need for Ms McMahon to demonstrate that she continues to meet the eligibility criteria and for the quantification of her claim. If these are not agreed, the tribunal will require to address these matters. If the criteria are being met at present, AXA will be under a continuing obligation to make the payments.”