Ill Health Severance Pay: Employer Guide & Rules

It’s a common misconception that dismissal due to ill health is automatically unfair or always unlawful. An employee can be both fairly and lawfully dismissed, as long as the employer has a valid reason, has made any reasonable adjustments where applicable, and has followed a fair procedure.

Ill health severance pay is a financial payment offered at the employer’s discretion to employees who are unable to continue working due to long-term illness or a medical condition. It typically forms part of a mutual agreement to terminate employment where the employee is no longer capable of performing their role and no reasonable adjustments or redeployment options can be viably made to support their return. There is no legal obligation to offer ill health severance pay, although it may be included in a settlement agreement or in the terms of the employment contract or policy.

Handling the process incorrectly, however, and getting entitlements such as ill health severance pay wrong, can result in complaints and even tribunal claims for unfair dismissal and unlawful discrimination.

For UK employers, therefore, managing ill health dismissal requires a balance between compassion for the employee and meeting the organisation’s needs.

 

Can you dismiss employees due to ill health?

 

To be able to fairly dismiss an employee in any context, you must first show that you have a valid reason for so doing and acted reasonably in all the circumstances. By law in the UK, there are various valid reasons for dismissing an employee, including where the reason relates to the capability of the employee for performing work of the kind that they were employed to do.

This means that it is possible to dismiss an employee where they are incapable of doing their job to the required standard by reason of ill health or where they are absent from work altogether on long-term sick leave. This is because you would otherwise be paying someone for a job that is either being performed inadequately or not being performed at all.

However, whether or not you can justify dismissal due to ill health will depend on all the facts. This could include the nature of the individual’s illness, the likelihood of further absences, the length of previous absences, the employee’s length of service, the impact on your business and on other members of staff, and the nature of any provisions within your organisation’s sickness policy.

Prior to making any decision to dismiss you may also need to explore other options to assist an employee in doing their job or returning to work.

 

Making reasonable adjustments

 

Dismissing an employee due to ill health must be based on their capability to do their job, and not because of any protected characteristic such as disability. Where a disability is involved, dismissal may amount to unlawful discrimination if the employer has failed to consider or implement reasonable adjustments. The Equality Act 2010 imposes a legal duty on employers to take reasonable steps to remove any disadvantage suffered by a disabled employee.

Dismissal because of a disability can often amount to unlawful discrimination. An employee will be classed as having a disability if they have a physical or mental impairment that has a substantial and long-term negative effect on their ability to carry out normal day-to-day activities.

You should only consider dismissing a disabled employee as a last resort, making reasonable adjustments within the workplace to remove any disadvantage that may be suffered by them. This could include making physical adaptations, like installing a ramp or the use of special equipment, such as an ergonomic chair. It could also include a phased return to work, amended duties and altered hours.

If an employee is dismissed by reason of their disability, the onus will be on you to show why you were unable to make any reasonable adjustments. If you can show that an employee cannot do their job because there are no reasonable adjustments that can be viably made to remove any disadvantage, it will be fair for you to dismiss them, even if they are disabled.

 

Ill health severance pay

 

There is no automatic entitlement to ill health severance pay, although an employee who is dismissed by reason of ill health will still be entitled to notice in accordance with the statutory minimum, or under their contract if greater. Ill-health dismissal payments, often referred to as “Special Severance Payments,” are typically made at the employer’s discretion, though they are not mandated by law.

An employee who is dismissed during sickness-related absence may still be entitled to full pay throughout their statutory notice period, even if they have exhausted their entitlement to sick pay. This will depend on the relationship between their contractual and statutory notice periods.

The extent of any pay during this period will depend on whether the employee is entitled to the statutory minimum period of notice or longer. This is calculated as 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 pay is due during the notice period when an employee is dismissed while off sick, you must compare the statutory notice entitlement with the contractual notice period.

If the contractual notice period is at least one week longer than the statutory minimum, the employee is only entitled to statutory or contractual sick pay, if applicable, during the notice period.

However, if the contractual notice is the same as or less than one week longer than the statutory minimum, the employee is entitled to full pay during their notice period, even if their sick pay entitlement has been exhausted. For example, if an employee with 2.5 years’ service has a contractual notice period of 4 weeks, their statutory notice would be 2 weeks. Because the contractual notice is more than one week longer than the statutory entitlement, the employee would not be entitled to full pay, only to sick pay if still eligible.

In contrast, if the same employee had 4 years’ service (making their statutory notice 4 weeks, matching the contractual notice), they would be entitled to full pay during the notice period, regardless of their sick pay status.

Employers should also be aware of the tax treatment of severance payments. Payments made under a settlement agreement may be tax-free up to £30,000 if they are non-contractual and relate to the termination of employment. However, payments in lieu of notice (PILON) and other contractual sums are usually subject to income tax and National Insurance contributions.

 

Can an ill health severance pay package be agreed?

 

As an alternative to dismissal, many employers will 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, not only out of compassion but to minimise any potential exposure to legal action.

This can provide the employee with a financial cushion until they are sufficiently fit to seek alternative employment. It can also provide a suitable incentive for an employee to agree to waive their right to any future complaints against you in return.

A settlement agreement is a legally binding document between an employer and employee that is designed to terminate that employment relationship on agreed terms, including any legal claims arising of the employment relationship.

These types of agreement are entirely voluntary, where terms may not necessarily be reached. However, the law allows the 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.

 

How should employers approach ill health severance pay?

 

Given that 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.

Very often this means that there will be offers and counter-offers from both sides. 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.

This means you must avoid putting undue pressure on an employee during this process, especially where they are sick and vulnerable, giving them plenty of time to respond to any settlement offer before deciding to dismiss them instead. A period of 10 calendar days is generally considered reasonable, allowing the employee to consider your terms and take independent legal advice.

You must also not discriminate against an employee by reason of any disability, where unlawful discrimination during any settlement discussions may in itself form the basis of a tribunal claim.

 

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

 

There are various strict statutory rules relating to settlement agreements, including ill health severance pay packages, where certain statutory requirements must be met for the agreement to be valid and enforceable.

These include the following:

 

• The agreement must be in writing
• The agreement must relate to a particular complaint or proceedings, specifically stating the nature of the claim(s) that it is intended to cover
• The 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
• The 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 that advice
• The agreement must identify the adviser
• The agreement must state that the applicable statutory conditions regulating the settlement agreement have been satisfied

 

The written agreement must contain specific provisions relating to the termination of employment, including a clearly defined waiver of the employee’s right to pursue certain legal claims. The waiver will need to list the specific claims being settled, such as unfair dismissal or disability discrimination. It is not sufficient to use general language such as “in full and final settlement of all claims”.

This waiver must make it clear that any claim for unfair dismissal and unlawful discrimination will no longer be possible. It will not be 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.

 

What are the risks of getting dismissal due to ill health wrong?

 

Where a capability issue is linked to an employee’s ill health, dismissal should only be used as a last resort after exploring all other ways in which you can help an employee to do their job or return to work.

Dismissal because of a disability can amount to unfair dismissal and unlawful discrimination. In either case, this can result in a significant award of damages being made against you, together with associated legal costs.

Even though an employee would usually need to accrue 2 years’ continuous service with you to claim for unfair dismissal, it is important to bear in mind that there is no such qualifying period for a claim for unlawful discrimination.

 

How can the risks of getting it wrong be avoided?

 

To minimise your risk of exposure to legal action, you should always look for ways to support an employee suffering from ill health, including making any reasonable adjustments within the workplace.

What is considered reasonable will depend on the facts of each case, although this will include the cost involved of making any adjustments, the extent of any resources available to you, as well as how practical and effective the adjustment is likely to be. As a large employer with deep pockets, you will be expected to explore a wide variety of options in discharging your statutory duty.

As a sensible starting point, you should regularly review and assess the employee’s fit notes. The employee is legally required to provide you with an official fit note from their GP after being off sick for more than 7 days in a row.

The fit note will typically provide recommendations from the employee’s GP as to what adjustments can be made to help them get back to work, such as a phased return, amended duties, altered hours or workplace adaptations. You could also ask the employee to undergo an occupational health assessment to determine what, if any, adjustments can be made to assist.

It is only having explored all other options, where there is no viable alternative, should you move to a decision to dismiss. Legal advice should always be sought in these circumstances to help minimise the risk of getting it wrong.

 

Need assistance?

 

DavidsonMorris’ employment lawyers can help with all aspects of employment terminations, including advice on notice periods, notice pay and settlements. For help and advice on a specific issue, speak to our experts.

 

Ill health dismissal FAQs

 

What is ill health severance pay?

Ill health severance pay is a financial payment made to an employee whose employment ends due to long-term illness or medical incapacity that prevents them from continuing in their role.

 

When is ill health severance pay offered?

It is usually offered when an employee can no longer work due to a medical condition and no reasonable adjustments or alternative roles can support their return to work.

 

Is ill health severance pay a legal requirement?

There is no statutory obligation to provide ill health severance pay. However, it may be included in employment contracts, company policies, or offered as part of a settlement agreement.

 

How is ill health severance pay calculated?

The amount depends on factors such as the employee’s length of service, salary, contractual terms, and the circumstances of their departure. It is often negotiated as part of a mutual agreement.

 

Do employees have to accept ill health severance?

Eemployees can choose whether to accept a severance offer. They may seek advice before agreeing to the terms, especially if signing a settlement agreement.

 

Can ill health severance be offered alongside other payments?

It can include compensation for loss of employment, payment in lieu of notice, accrued holiday pay, and sometimes an ex gratia payment.

 

What is a settlement agreement?

A settlement agreement is a legally binding document where the employee agrees to the terms of their departure, often in exchange for severance pay. It also prevents future claims against the employer.

 

What risks do employers face when offering ill health severance?

Employers must ensure they follow a fair process, explore reasonable adjustments, and avoid any potential claims of disability discrimination under the Equality Act 2010.

 

Can an employee claim unfair dismissal if severance is offered?

If the process is not handled fairly or the employee feels pressured, they may still pursue a claim for unfair dismissal or discrimination.

 

Glossary

 

Term	Definition
Ill Health Severance Pay	A financial payment made to an employee whose employment is terminated due to long-term illness or incapacity to work, usually as part of a mutual agreement.
Reasonable Adjustments	Changes or adaptations made in the workplace to support disabled employees in performing their duties and removing disadvantage.
Capability Dismissal	A dismissal based on an employee’s inability to perform their job, which can include dismissal due to ill health.
Settlement Agreement	A legally binding contract where an employee waives their right to bring legal claims against their employer, usually in exchange for a severance payment.
Statutory Notice Period	The minimum notice period an employer must give an employee when ending employment, based on length of service.
Contractual Notice Period	The notice period set out in an employee’s contract of employment, which may be longer than the statutory minimum.
Fit Note	A statement from a healthcare professional indicating whether an employee is fit for work and recommending any adjustments needed.
Occupational Health Assessment	An evaluation conducted to assess an employee’s fitness to work and what support or adjustments may assist their return.
Unfair Dismissal	A dismissal that is not legally justified or where a fair procedure has not been followed. Employees generally need two years’ service to claim.
Disability Discrimination	Unlawful treatment of an employee due to a disability, in breach of the Equality Act 2010.
Without Prejudice Discussions	Confidential negotiations intended to settle a dispute, which generally cannot be referred to in tribunal proceedings.
Ex Gratia Payment	A discretionary payment made by an employer to an employee on a goodwill basis, not legally required under contract or statute.
Independent Legal Advice	Advice given by a qualified solicitor or adviser to an employee entering into a settlement agreement, required for the agreement to be valid.
Statutory Sick Pay (SSP)	A weekly payment made to employees who are too ill to work, provided they meet eligibility criteria under UK law.