Permanent health insurance (PHI) is one of those benefits that can quietly create major problems for employers and HR teams, particularly at dismissal. The recent decision in McMahon v AXA ICAS Ltd is a clear reminder that, if not managed carefully, PHI can expose employers to long-term and unexpected liabilities.
What is PHI?
PHI (often called group income protection) provides employees with a percentage of their salary if they’re unable to work due to long-term illness. Although payments are made via an insurer, employees usually need to remain employed to keep receiving them. That’s where the difficulty begins.
In practice, if you are managing long-term absence, you may want to start a formal process to address whether the employee can continue in their role. However, case law has long made clear that dismissing an employee in a way that cuts off their PHI entitlement can be risky. Courts may treat this as a breach of contract, even if you have a clear right to dismiss on notice.
McMahon v AXA ICAS Ltd
The Court found that PHI payments can count as “wages”. That means if an employee loses those payments as a result of being dismissed, they may be able to bring a claim for unlawful deduction from wages — and those claims can survive the ending of employment. This matters because these claims can be more straightforward to bring and, importantly, do not require the employee to reduce their losses by finding other work.
PHI is not just another benefit – it needs active management
Problems often arise where contracts, policies, and insurance arrangements are not fully aligned, or where decisions are made without considering the impact on PHI entitlement.
4 practical steps for employers
- Regularly check that contracts accurately reflect the insurance in place.
- Be cautious before starting dismissal processes for employees on long-term sick leave, particularly if they may qualify for PHI.
- Ensure policies are renewed without gaps.
- Seek advice early – before decisions are made.
Handled well, PHI is a valuable benefit. Handled badly, it can become a long-term financial liability.
Further reading
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