For a number of years now, it has been well understood by lawyers that businesses with permanent health insurance (PHI) schemes need to tread very carefully when proposing to dismiss an employee for health-related reasons.  The recent case of McMahon v AXA ICAS Ltd has underlined the significant risks that can arise when things go wrong.

The facts 

Ms McMahon was employed under a contract of employment which guaranteed her the benefit of a PHI arrangement.  More specifically, in cases of chronic illness or injury causing sustained sickness absence (26 weeks or more), the insurance was meant to kick in to pay her a sum equivalent to 75% of her salary for so long as she remained away from work (until the age of 65). 

AXA terminated Ms McMahon's employment in September 2013.  At the point of dismissal, she had been absent from work by reason of ill-health for more than two years.  During this time, despite the PHI arrangement laid out in her contract, she had not received any related payments.

Following the termination of her employment, she brought claims against AXA, arguing that the failure to make payments under the PHI scheme amounted to a series of unlawful deductions from her wages. Initially, she claimed all sums due to her up to the termination of her employment only.  However, she subsequently attempted to amend her claim, with a view to claiming for the loss of PHI payments after the termination of her employment as well.

What did the appeal court say?

The Court of Session (the Scottish court of appeal) relied on previous case law to conclude that AXA was in breach of the contract of employment insofar as it had dismissed Ms McMahon for health-related reasons.  Implied into her contract of employment was a provision which effectively prevented AXA from lawfully dismissing her in circumstances which would frustrate her capacity to receive PHI payments.  The Court also concluded, for slightly complicated legal reasons, that the termination of her employment did not terminate her ongoing right to benefit from the ongoing PHI payments.  

It is worth noting that the Court reached its conclusions, notwithstanding the fact that AXA had never actually purchased an insurance policy to cover Ms McMahon's employment.  As a result, the full cost of her claim is going to have to be covered by AXA itself. 

A worrying cost

Exactly how much this claim may prove to be worth is difficult to say, based on the information available in the relevant judgments.  However, depending on her precise age and her annual salary, it could easily be worth many hundreds of thousands of pounds.

These days, it’s essential that you understand your own benefits, appropriately document them in your contracts of employment and properly account for them in your dealings with your employees.  If you want us to help share the load, please get in touch.