Why employers make these offers
A fair ill-health dismissal takes time. The employer needs up-to-date medical evidence, must consult you, consider reasonable adjustments and alternative roles, and wait a reasonable period for recovery. A settlement agreement shortens that. It can suit you too, if the terms reflect what you would be giving up.
Check these before anything else
Income protection
If your employer has a group income protection or permanent health insurance scheme, you may be entitled to a proportion of your salary for years, sometimes until retirement, once you have been absent for the deferred period. Most policies only pay while you remain employed. Signing a settlement agreement that ends your employment can end the claim.
Ask for the policy terms. If you may qualify, the choices are to stay employed and claim, or to negotiate a settlement that reflects the capitalised value of the benefit. Employers who dismiss to defeat a PHI claim are likely to be in breach of contract.
Ill-health retirement
Defined benefit pension schemes, and some defined contribution schemes, offer an enhanced early pension if you are permanently unable to work. Applications usually have to be made while you are still employed.
Critical illness, life and medical cover
These normally end with employment. If you are in treatment, ask for medical cover to continue for a period.
Sick pay
Work out how much contractual sick pay you have left. Statutory sick pay, payable from the first day of absence since April 2026, is £123.25 a week for up to 28 weeks.
Your legal position
If your condition is a disability, your employer must not treat you unfavourably because of something arising from it, such as absence, unless it can justify that as proportionate. It must make reasonable adjustments: a phased return, changed duties or hours, equipment or a different role.
A settlement offer made without exploring adjustments is a sign that a disability discrimination claim may exist. Those claims are uncapped and include injury to feelings, so the offer should be measured against them and not only against unfair dismissal.
Valuing the offer
Add together:
- remaining sick pay you would receive if you stayed;
- notice pay, which is payable at full pay in most cases even if your sick pay has run out, where your contractual notice is less than a week longer than the statutory minimum;
- accrued holiday, which continues to build during sickness absence;
- the value of any PHI or ill-health pension rights;
- compensation for your claims, allowing for the longer time it may take you to find work.
Tax: the disability and injury exemption
Section 406 of the Income Tax (Earnings and Pensions) Act 2003 exempts a termination payment made on account of the injury or disability of the employee. Where it applies, the payment is tax-free without limit. HMRC reads it narrowly. There must be an identified medical condition that prevents you doing your job, and the payment must be made because of that condition and not simply because employment is ending. Medical evidence and clear wording in the agreement are needed. Otherwise the ordinary £30,000 rule applies. See tax on settlement agreements.
Personal injury claims
If work caused or worsened your condition, for example through stress, the agreement will usually ask you to waive personal injury claims you know about. That waiver can be valuable to the employer. Tell your adviser about any work-related illness so it can be valued or carved out.
Capacity and timing
You need to be well enough to understand the agreement and give instructions. If you are not, say so and ask for more time. The Acas minimum of 10 calendar days is a floor, and a reasonable employer will extend it on medical grounds. See should I sign?
Frequently asked questions
Can my employer offer a settlement agreement while I am off sick?
Yes, but the approach must be handled sensitively. Pressure, or contacting you against medical advice, can amount to improper behaviour or disability discrimination.
Will I lose my sick pay if I sign?
Company and statutory sick pay stop when employment ends. Factor in what you would have received if you stayed.
Am I classed as disabled?
Under the Equality Act you are if you have a physical or mental impairment with a substantial, long-term adverse effect on normal day-to-day activities. Long-term means it has lasted or is likely to last 12 months. Cancer, HIV and multiple sclerosis count from diagnosis.
Can I be dismissed for long-term sickness?
Yes, if the employer follows a fair capability process, obtains medical evidence, consults you and considers adjustments and alternatives. Skipping those steps makes the dismissal unfair and possibly discriminatory.
Sources
About this guide. This page is general information, not legal advice, and reflects the law and published government plans on the date shown above. Frederick George is a legal referral service, not a law firm. For advice on your own circumstances we will introduce you to an SRA-regulated solicitor.