Using settlement agreements with ill health

Using settlement agreements with ill health

At HR and You Ltd we manage Settlement Agreements and of course, ill health for Employers, and we ensure that we offer the best outcome, a Settlement Agreement can be the best option all round in this circumstance, in essence, a settlement agreement is a way in which to terminate an Employees employment on mutually agreed terms, that means that the Employee cannot bring a claim against you in an employment tribunal.

In our article today, we take a look at settlement agreements specifically in cases of ill health, although there are many other reasons for using these to end an employment relationship.


Just what is a Settlement Agreement?

To simplify this, a Settlement Agreement is a legally binding agreement either during or following the termination of employment, which brings the employment to an end.

It is recognised by statute and is the only way you can validly “contract out” of your employment law rights.

It usually provides for a severance payment; in return for which the Employee agrees not to pursue any claim or grievance they may have in an employment tribunal.

Today and for the purposes of this article we are just looking at ill health, there are many other reasons they can be used, and we always advise you to seek our expert advice seek our expert advice 


As an Employer can I offer severance pay Employee due to ill health?

Whilst there is no automatic entitlement to ‘ill health’ severance pay, it is important to remember that an Employee who is dismissed by reason of ill health will still be entitled to notice in line with the statutory minimum, or in line with their Contract of Employment which may provide them more. Any payment of sickness may be due at full payment rate throughout the notice period, and this may be where they have exhausted their entitlement to statutory sickness payments (SSP) or contractual payments (in line with their Contract of Employment).

When considering and making payment of notice, payment will be dependent on whether the Employee is entitled to the statutory minimum or longer. For your information statutory notice periods are:

  • one week for those with service of between a month and less than 2 years
  • with an additional week for each complete year, up to a maximum of 12 weeks


To determine whether full payment is due during any dismissal period, you will need to compare the length of the statutory notice to which the Employee is entitled and any contractual notice. If the contractual notice period is a week (or more) longer than the statutory minimum, the Employee will not be entitled to full pay, although you will still need to pay them sick pay where any entitlement remains.

Let’s take a look at an example:

  • employee’s contract provides for 4 weeks’ notice, the Employee has 2.5 years’ service and is dismissed due to and whilst on long-term sick leave, it is established their entitlement to sick pay has been fully used, therefore, they would not be entitled to be paid during their notice period. This is because the statutory minimum notice is 2 weeks, where the contractual notice of 4 weeks is more than 1 week longer
  • same Employee with 4 years’ service, the statutory and contractual notice is the same, so they would be entitled to be paid in full during this period


Can an ill health severance pay package be agreed upon with a settlement agreement?

When dealing with a Settlement Agreement it is worth noting that it does lead ultimately to the dismissal of employment, that being said, they can be used as an alternative to dismissal, and many Employers consider some form of settlement agreement or ill health severance pay package when looking to terminate employment for an Employee on long-term sick leave.

Offering a settlement agreement brings the employment relationship to an amicable end, doing so not only minimises any potential exposure to legal action but can be the compassionate thing to do too.  Using a settlement agreement can provide the Employee with financial support until they are in a position, and well enough to seek alternative employment, they also provide the incentive for the Employee to agree to waive their right to any future complaints against you as the Employer in return.

Settlement agreements are legally binding documents between both parties, they are designed to terminate the employment relationship on agreed terms, including any legal claims arising from the employment relationship.

It is important to note that settlement agreements are voluntary, where terms may not necessarily be reached. However, the law permits both parties to safely enter into confidential discussions on a ‘without prejudice’ basis, whereby evidence of pre-termination negotiations will be inadmissible in any subsequent proceedings, we strongly advise our support when planning on entering into any discussions.


As an Employer how should I approach ill health severance pay by way of a settlement agreement?

As mentioned, a settlement agreement is designed to bring the employment relationship to an end on mutually agreed terms, an agreement can only usually be reached through a process of discussion and negotiation.

It does mean that there will be offers and counteroffers from both parties. However, for these pre-termination negotiations to remain confidential, you must ensure that there is no improper behaviour associated with either the offer of ill health severance pay or any other settlement terms.

Undue pressure on the Employee during this process must be avoided, and it is even more important when dealing with ill health, a period of 10 calendar days is considered reasonable, this timeframe allows the Employee to consider the terms and obtain independent legal advice.

You mustn’t discriminate against the Employee by reason of disability, where unlawful discrimination during any settlement discussions may in itself form the basis of a tribunal claim.


What are statutory rules to consider relating to ill health severance pay?

As a settlement agreement is a legally binding document, as the Employer you need to consider the various strict statutory rules relating to settlement agreements, these include ill health severance pay packages, where certain statutory requirements must be met for the agreement to be valid and enforceable, including the following:

  • agreement must be in writing
  • agreement must relate to a particular complaint or proceedings, specifically stating the nature of the claim or claims that it is intended to cover
  • employee must have received advice from a relevant independent adviser on the terms and effect of the proposed agreement, as well as its effect on their ability to pursue that complaint or proceedings before an employment tribunal
  • independent adviser must have a current contract of insurance, or professional indemnity insurance, covering the risk of a claim by the Employee in respect of loss arising from the advice provided
  • agreement must identify the adviser
  • agreement must state that the applicable statutory conditions regulating the settlement agreement have been satisfied
  • written agreement will need to contain various key provisions relating to the termination of employment, including a waiver of the Employee’s right to bring a legal claim in return for a discretionary ill health severance payment


It is not sufficient to simply state that the agreement is ‘in full and final settlement of all claims’. To be legally binding the agreement has to specifically state the claims it is intended to cover. The waiver must make it clear that any claim for unfair dismissal and unlawful discrimination will no longer be possible.



While this article has given you enough of an overview of what the role of a Settlement Agreement is when managing ill health, this is a complex topic, it is impossible to cover every aspect of them in a single article. We have other articles relating to settlement agreements, please take a read.

If you need to manage, or have an issue with an Employee, and need any extra help or support through the process, we at HR and You Ltd are experienced in our understanding of Settlement Agreements, in particular, due to ill health, do not hesitate to contact us via email, [email protected], or phone, 0333 006 9489, for a no-obligation chat to find out whether our services are right for you.





This article contains a general overview of information only. It does not constitute, and should not be relied upon, as legal advice. You should consult a suitably qualified lawyer on any specific legal problem or matter.

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This document is intended to serve as general guidance only and does not constitute legal advice. The application and impact of laws can vary widely based on the specific facts involved. This document should not be used as a substitute for consultation with professional legal or other competent advisers. Before making any decision or taking any action, you should consult a HR and You Ltd Consultant or a member of our legal team.

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