PHI Benefit Payments Can Remain “Wages” After Dismissal Where the Obligation Survives Termination

1. Introduction

The appeal concerned whether payments promised under a contractual permanent health insurance (“PHI”) scheme can remain recoverable as “wages” for the purposes of an unauthorised deduction claim under s 13 of the Employment Rights Act 1996 (“ERA”), even after the worker has been dismissed because illness prevents a return to work.

The appellant (the employee) had a long-term illness and, under her contract, became entitled (after a qualifying absence period) to PHI benefits calculated as a percentage of normal earnings, intended to be funded by an insurance policy arranged and paid for by the employer. The benefits were not paid. The employer later dismissed her for incapacity.

A prior stage of litigation had already determined (and was no longer appealed) that, while employment subsisted, the employer was itself contractually obliged to make the PHI payments and that non-payment could amount to an unauthorised deduction from wages. The “novel issue” in this appeal was the post-dismissal period: could the employee amend her claim to seek continuing monthly deductions from dismissal to “the present day” on the footing that the PHI payment obligation survived dismissal?

2. Summary of the Judgment

• The Inner House allowed the appeal and held that the Employment Tribunal (“ET”) had erred in law in refusing the amendment on the basis that the claim had little prospect of success ([47]).
• The court distinguished Delaney v Staples [1992] 1 AC 687 and held it was not harmful to the proposed claim; if anything, its broad reading of “in connection with employment” assisted the employee ([26]–[29]).
• The court accepted that PHI benefits can fall within the extended definition of “wages” in s 27 ERA, even though they are not “wages” in the ordinary sense as consideration for work done ([11]–[12], [43]).
• Crucially, the court held the employer could not rely on dismissal (on the grounds of incapacity) to terminate the PHI payment obligation: the obligation could be analysed as collateral to the “employment relationship”, or the dismissal could be treated as ineffective/invalid for this purpose because it sought to defeat the PHI entitlement ([41]–[46]).
• The case was remitted to the ET with a direction to allow the amendment; remaining issues were eligibility criteria and quantification (and potentially ongoing payment if eligibility continued) ([47]).

3. Analysis

3.1 The statutory framework: ss 13 and 27 ERA

Section 13 ERA prohibits unauthorised deductions from the wages “of a worker employed” by the employer. Section 27 defines “wages” broadly, including sums payable “in connection with” employment and “emolument[s] referable to” employment (s 27(1)). The court treated PHI scheme payments as capable of fitting within this extended definition ([11]–[12]).

The dispute therefore turned less on whether PHI payments can ever be “wages” (that point had effectively been resolved in the employee’s favour for the pre-dismissal period) and more on whether dismissal necessarily ends the relevant obligation such that nothing remains “payable” under s 13 ([21]).

3.2 Precedents cited and how they shaped the decision

(a) Delaney v Staples [1992] 1 AC 687

The ET and EAT had treated Delaney as making it “very difficult” to characterise post-termination sums as “wages”. The Inner House disagreed. It explained that Delaney concerned a payment in lieu of notice, which (i) is not “wages” in the ordinary sense because no work is done after termination, and (ii) was ultimately excluded for functional/structural reasons arising from the Wages Act 1986 scheme—reasons not applicable to PHI payments ([26]–[29]).

Importantly, the court highlighted that Lord Browne-Wilkinson accepted that the “employment relationship” might end while the contract remains undischarged ([29]). This became a building block for the court’s later reasoning that a dismissal may not eliminate all contractual obligations.

(b) Geys v Société Générale [2012] UKSC 63, [2013] 1 AC 523

Geys was introduced by the court post-hearing for submissions, reflecting its perceived relevance ([15]). The Inner House drew from the majority’s “elective theory”: a repudiatory breach does not automatically terminate the contract unless accepted by the innocent party. The court also noted the Supreme Court’s emphasis on “manifest justice” and avoiding a wrongdoer benefitting from their wrong ([16]).

Beyond acceptance/affirmation, the court considered Lord Sumption’s distinction between obligations dependent on the continued employment relationship and “collateral” obligations that may not depend upon it ([15], [18]–[19], [45]). This supported the possibility that PHI-payment obligations can survive even where the personal work relationship has ended.

(c) Collateral obligations and employment “status”: Gunton v Richmond-upon- Thames LBC [1981] Ch 448 and related discussion

The court adopted (as persuasive) the analysis that termination ends the “status” of employer/employee (and thus the core “work/wage” exchange), but does not necessarily terminate every contractual obligation; non-status-dependent obligations may survive ([30]). It relied on Brightman LJ’s statement in Gunton that while a wrongfully dismissed servant cannot sue for wages, it does not follow that the contract has terminated; obligations not dependent on the relationship may survive ([30]).

(d) “Effective date of termination” and conceptual separation: Robert Cort & Son Ltd v Charman [1981] ICR 816

Responding to arguments based on s 97 ERA (effective date of termination), the court approved the view that a contract’s termination may “take effect” for statutory purposes at dismissal even if, on an elective theory, the contract may continue for some purposes thereafter ([32]). This helped the court reconcile (i) statutory “termination” concepts with (ii) the survival of some contractual rights/obligations.

(e) PHI implied-term cases: Aspden v Webbs Poultry and Meat Group (Holdings) Ltd [1996] IRLR 521

The employee’s amendment had relied on Aspden. The Inner House treated it as supportive background illustrating that, in PHI contexts, courts have implied restrictions on dismissal powers to prevent employers from defeating PHI entitlements ([33]–[35]).

Although Aspden was pled as damages for breach of contract (and the judge noted the dismissal was not contended to be a nullity), Sedley J’s discussion of a potential “collateral contract” or other analyses was significant: it pointed to doctrinal routes by which PHI protections can be preserved without forcing ongoing personal service ([35]).

(f) Modern implied-terms approach: USDAW v Tesco Stores Ltd [2024] UKSC 28, [2025] ICR 107

The court considered USDAW “worth noting” and drew an analogy: the Supreme Court implied a term preventing an employer from using a contractual termination power to defeat an important contractual remuneration right ([37]–[40]). The Inner House viewed the parallels as “obvious”: a PHI entitlement (like a pay guarantee) would be undermined if the employer could terminate simply to avoid the promised benefit ([39]).

This case strengthened the Inner House’s conclusion that it was at least strongly arguable (indeed correct in law) that dismissal for incapacity should not be allowed to nullify PHI-payment obligations designed to respond to incapacity.

(g) Other authorities

• Thomas Marshall (Exports) Ltd v Guinle [1978] ICR 905 was used to illustrate enforceability of certain contractual restraints (confidentiality/non-compete) despite the impracticality of forcing ongoing work—supporting the broader theme that not all obligations are “status-dependent” ([19]).
• McNeill v Aberdeen City Council 2014 SC 335 was referenced in relation to “core” versus “collateral” obligations, though the Inner House rejected the employer’s attempt to treat the PHI benefits as merely “core wages” extinguished by dismissal ([43]).

3.3 The court’s legal reasoning: why the amendment had real prospects

The court reframed the problem identified by the ET/EAT. The proposed amended claim was not (necessarily) a damages claim dressed up as “wages”. Rather, it sought enforcement of a contractual promise to make PHI payments—payments that are:

• triggered by incapacity (not by ongoing performance of work), and
• capable of being “wages” under the ERA’s extended statutory definition (s 27), even if not “wages” in the ordinary work-for-pay sense ([17], [43]).

The court offered multiple coherent legal routes to the same practical conclusion that the employer could not rely on dismissal to escape PHI payments:

1. Collateral-obligation analysis: the PHI obligation is collateral to the personal employment relationship (delectus personae). The relationship may be ruptured, but the PHI promise remains enforceable while eligibility is met. On this analysis, dismissal “has no direct relevance” to whether the PHI sums are being unlawfully withheld ([17]–[21], [42], [45]).
2. Implied-term / abuse-of-termination-power analysis (in the spirit of USDAW): it was impliedly agreed the employer had no power to terminate for the purpose (or effect) of depriving the employee of PHI benefits. A dismissal for incapacity, deployed to thwart the scheme, is ineffective in that respect—“writ in water” ([44]).
3. Elective theory (from Geys): the contract might not have ended if the employee did not accept the repudiation. The court noted factual difficulties in resolving acceptance/affirmation on appeal, and did not base its disposal on this route ([46]).

On the court’s approach, the ET had refused the amendment primarily because it saw the point as foreclosed by Delaney and by the fact of dismissal. That was an error of law. Once corrected, timing and case-management factors were “neutral or of secondary importance” and could not justify refusal ([47]).

3.4 Impact and significance

• Post-termination ERA wage claims can be viable where the “wage” is a surviving contractual payment obligation: the decision supports a structured distinction between (i) ordinary wages for work (generally ending with the relationship) and (ii) statutory “wages” under s 27 ERA that are payable independent of ongoing service, such as PHI benefits ([17], [43]).
• Employers face increased exposure where PHI arrangements are not properly insured/implemented: if the employer has undertaken an obligation to pay PHI benefits (whether directly or by failing to secure insurance as promised), dismissal for incapacity may not end that obligation. This increases the importance of compliant scheme documentation and insurance placement/administration.
• Remedial pathway shifts from damages to enforcement: instead of forcing an employee into a potentially speculative damages claim (notably uncertain duration of incapacity), the court’s approach allows the primary promise (ongoing PHI payments while eligible) to be enforced through the ERA deductions regime ([41]–[42]).
• Tribunal practice on amendments: where a proposed amendment turns on an arguable (or correct) legal characterisation of continuing contractual obligations, tribunals should be cautious about treating termination as automatically extinguishing the relevant obligation, and about over-reading Delaney as a general bar.

4. Complex concepts simplified

• Permanent health insurance (PHI): an income-replacement benefit payable when an employee cannot work due to illness/injury, often intended to be funded by employer-arranged insurance. Its logic is to operate when working stops.
• “Wages” under s 27 ERA: broader than normal “pay for work”; it can include sums payable “in connection with” employment, allowing certain benefits to be pursued through s 13’s “unauthorised deduction” route.
• Employment relationship vs contract of employment: the “status” relationship (working under direction, mutual trust, etc.) may end on dismissal, but some contractual promises (e.g., restrictive covenants or arguably PHI obligations) can survive.
• Repudiatory breach and the “elective theory”: a wrongful dismissal is a serious breach; under Geys v Société Générale [2012] UKSC 63, [2013] 1 AC 523, it may not end the contract unless the innocent party accepts the breach—though factual questions can arise as to whether acceptance occurred.
• Implied terms preventing abuse of termination powers: as illustrated by USDAW v Tesco Stores Ltd [2024] UKSC 28, [2025] ICR 107, courts may imply a term preventing an employer from using a termination clause to defeat a fundamental promised benefit.

5. Conclusion

The Inner House in [2026] CSIH 19 establishes that contractual PHI benefits may remain recoverable as “wages” for ERA s 13 purposes after dismissal, where the obligation to pay is properly analysed as surviving termination (as a collateral obligation) or where dismissal for incapacity cannot validly be used to defeat the PHI entitlement. The decision corrects an overbroad reliance on Delaney v Staples [1992] 1 AC 687 and aligns PHI protection with modern implied-term reasoning seen in USDAW v Tesco Stores Ltd [2024] UKSC 28, [2025] ICR 107. Practically, the ruling strengthens employees’ ability to pursue ongoing PHI non-payment through the tribunal’s wages-deduction jurisdiction rather than being confined to uncertain, potentially time-barred damages claims.