Appeal under section 37 of the Employment Tribunals Act 1996 by Carol McMahon against AXA ICAS Ltd now named AXA Health Services Ltd (Court of Session)

Factual and Procedural Background

This appeal was delivered by Judge Malcolm to the Extra Division, Inner House, Court of Session. The Appellant began employment in January 2000 with the Respondent. The Appellant became eligible for benefits under a permanent health insurance ("PHI") scheme in May 2011 but received no payments. In September 2013 the Appellant was dismissed because long-term illness prevented work. The Appellant brought a claim under section 13 of the Employment Rights Act 1996 for unauthorised deductions for the period May 2011 to June 2013; the Employment Tribunal (ET) held that the Respondent was contractually obliged to meet the scheme payments while the Appellant remained an employee and unable to work. The Employment Appeal Tribunal (EAT) refused the Respondent's appeal against that decision in January 2025. While the wages claim was pending the Appellant sought leave to amend to plead a continuing deduction claim monthly from May 2011 to the present on the basis that the PHI entitlement survived dismissal (including by reference to an implied term). The ET refused that amendment (11 April 2022); the EAT upheld the ET's refusal. The EAT later granted permission to appeal to this court on the novel issue whether PHI payments continue to be due and payable as "wages" under sections 13 and 27 of ERA after termination of the contract of employment. This opinion resolves that appeal and remits the matter to the ET for further steps.

Legal Issues Presented

1. Whether payments due to an employee under a permanent health insurance scheme set out in her contract of employment continue to be due and payable as "wages" under sections 13 and 27 of the Employment Rights Act 1996 after dismissal for illness.
2. Whether a dismissal that is in breach of an implied contractual term (preventing dismissal because of incapacity) can be treated as ineffective so that obligations to pay PHI benefits survive termination.
3. Whether the Employment Tribunal erred in refusing permission to amend the section 13 claim to allege continuing unauthorised deductions after dismissal.
4. The implications of Geys v Société Générale and the distinction between "core" and "collateral" contractual obligations for enforcement of post-termination benefits under an employment contract.

Arguments of the Parties

Appellant's Arguments

• The PHI payments constituted sums "in connection with" the qualifying employment or an "emolument referable to (her) employment" under section 27(1) and therefore were "wages" for the purposes of section 13.
• The Appellant became eligible in May 2011 and the entitlement persisted; dismissal was in breach of an implied term preventing dismissal because of incapacity and thus did not extinguish the entitlement to PHI payments.
• The proposed amendment to plead continuing monthly unauthorised deductions did not add prohibitive legal or factual complexity and sought enforcement of contractual payments rather than damages for breach of contract.

Respondent's Arguments

• The Respondent's contractual obligation was only to arrange and pay for a suitable insurance policy; failure to secure or to pay by the insurer did not give rise to a section 13 unauthorised deduction claim.
• Any entitlement to payments depended on the subsistence of the employment relationship; termination of employment ended the right to wages and a section 13 claim could not extend beyond dismissal.
• The proposed amendment in substance advanced a breach of contract claim (damages) rather than a legitimate section 13 claim and would increase the claim's scope, potential cap and time bar exposure.

Table of Precedents Cited

Court's Reasoning and Analysis

The court began by construing sections 13 and 27 of ERA: section 13 prohibits unauthorised deductions from the wages "of a worker employed by him" and section 27 provides a broad statutory definition of "wages" including sums payable "in connection with (her) employment". The court accepted that PHI payments can fall within that extended definition.

The court analysed the interaction between termination of the employment relationship and the underlying contract of employment, adopting the distinction drawn in Geys between obligations dependent on continued personal service and collateral obligations that do not. The court held that PHI obligations can be collateral to the employment relationship and are capable of surviving or remaining enforceable despite the ending of the employee's status.

Delaney was examined and distinguished: Delaney concerned payment in lieu of notice and statutory and practical problems in treating such payments as "wages"; those concerns did not apply to a PHI scheme of the kind in issue. The court therefore rejected the tribunals' reliance on Delaney as fatal to the proposed amendment.

The court considered alternative legal analyses available on the facts: (a) the PHI obligations are collateral contractual obligations enforceable despite termination; (b) an implied term (as in Aspden and USDAW) prevented dismissal for incapacity aimed at depriving the employee of PHI entitlements, rendering the dismissal ineffective for that purpose; (c) under the elective theory in Geys, the employee may be taken not to have accepted repudiation so the contract (or relevant obligations) continues. The court expressed particular support for the collateral-obligation approach while noting the approaches are not mutually exclusive.

The ET's refusal of the amendment was reviewed: the ET had relied on timing, increased scope, hardship and Delaney-based legal objections. The court found that, on the uncontested key facts, the ET's dominant legal reason for refusing to allow the amendment (that the sums post-dismissal could not be wages) was erroneous in law.

Holding and Implications

APPEAL UPHELD

Disposition: The court allowed the appeal and remitted the matter to the Employment Tribunal with a direction that the proposed amendment seeking to plead continuing unauthorised deductions of PHI payments should be allowed.

Implications: As a result, if the Appellant continues to meet the eligibility criteria for the PHI scheme, the Respondent is under a continuing contractual obligation to make the PHI payments; the ET must determine eligibility and quantify the claim if not agreed. The court's decision authorises the amended section 13 claim to proceed to those factual and quantification issues. The opinion does not purport to resolve those factual questions and leaves their determination to the ET.