Settlement agreement after a long-term sickness absence

Ending the employment of someone who is ill is the exit employers get wrong most often, because the employee is likely to be disabled within the Equality Act, the claims are not covered by the protected conversation, and the employee may be giving up insurance benefits worth more than any settlement. A settlement agreement can be the right outcome where the employee cannot return and both sides want certainty, but it has to follow medical evidence and a process, take account of the adjustments that were considered, deal with pension and insurance properly, and be offered to an unwell person with care. I draft the agreement for the employer for a fixed fee of £795, delivered in three working days, with a note on the conversation; a version including negotiation with the employee's adviser is £995.

Who this is for

Employers in England and Wales with an employee on long-term sickness absence where a return seems unlikely and the employee or the employer has raised the possibility of an agreed exit.

What matters in a long-term sickness settlement agreement

Why settlement is considered and when it should not be

Settlement is considered where the medical evidence suggests the employee cannot return to the role within a reasonable time, adjustments and alternatives have been considered and are not workable, and both sides would prefer an agreed ending to a capability dismissal; it should not be considered as a way of avoiding adjustments, as a response to the employee's absence alone without medical evidence, or where the employee would lose permanent health insurance or ill-health retirement benefits worth more than the settlement, because a dismissal in those circumstances is discrimination arising from disability and a breach of the implied term, and a settlement signed in ignorance of the benefits may be set aside.

Disability, adjustments and the claims that make this exit different

An employee absent long-term is likely to be disabled under section 6 of the Equality Act 2010, so the employer owes the duty to make reasonable adjustments under section 20 and is exposed to claims for discrimination arising from disability under section 15 if the dismissal is because of the absence and cannot be justified; the protected conversation under section 111A of the Employment Rights Act 1996 does not cover those claims, so the offer must be made without prejudice on the basis of a genuine dispute or as part of an open process in which settlement is one of the options discussed, and the agreement waives the discrimination claims under section 147 of the Equality Act 2010 with the employee's adviser certifying the advice.

The medical evidence and the process before the offer

Before offering, the employer should have an occupational health report or medical evidence on the prognosis, the likelihood and timescale of a return, and the adjustments that might enable one, should have consulted the employee about it (with the employee accompanied, and adjustments to the meeting itself where needed), should have considered alternative roles and a phased return, and should have recorded why they are not workable; the offer is then one outcome of a process rather than a substitute for it, and the note that comes with the agreement sets out the steps so that the employer can see which it has taken.

The package, the injury and disability exemption and the tax

The package usually comprises notice (the employee's full notice paid in lieu, with pay at the rate section 87 of the Employment Rights Act 1996 provides where sick pay has run out), accrued holiday, and a compensation payment, and the tax treatment has a feature particular to ill-health exits: a payment made on account of injury or disability of the employee is exempt from income tax without limit under section 406 of the Income Tax (Earnings and Pensions) Act 2003 where the conditions are met, which can make the whole payment tax-free rather than only the first thirty thousand pounds under section 403; the agreement should state the basis of the payment and the accountants should confirm the treatment, with a tax indemnity from the employee.

Pension, insurance benefits and what the employee gives up

The agreement should address the employee's pension (any ill-health retirement option under the scheme rules, which may be more valuable than the settlement and which the employee should be told to consider), permanent health insurance or income protection (which usually pays only while the employee remains employed, so that a dismissal ends it, and which the employee must be advised about before signing), death in service and private medical cover (which end with the employment unless the agreement provides a continuation period), and statutory sick pay; the agreement should record that the employee has been told of these benefits and has taken advice on them, because a settlement that costs the employee an income protection benefit is the one that is challenged.

The conversation with an employee who is unwell

The employee is ill, may be anxious, may have cognitive or energy limitations, and may be represented by a family member or a union, and the conversation should be arranged with that in mind: in writing or by a call at a time the employee chooses, with the employee's chosen companion, with the offer set out clearly and the time to consider it extended beyond the Acas Code's minimum, with the adviser's fees contributed to under section 413A of the Income Tax (Earnings and Pensions) Act 2003, and without any suggestion that the employee must decide before they are able; the note sets out how to open and conduct the conversation, and the agreement is drafted so that the employee's adviser can see that the employer has considered the employee's position.

What it costs

Settlement agreement, £795. Drafted for your situation, with a note on how to have the conversation. Three working days.

Settlement agreement including reasonable negotiation with the employee's adviser, £995. The agreement in three working days. The negotiation then runs until the agreement is signed or it becomes clear it will not settle. Reasonable negotiation means what, in my experience, amounts to the standard back and forth on a settlement agreement. If the employee or their adviser is being unreasonable, for example by conducting themselves unprofessionally or requiring a substantial rewrite that needs material further legal advice to you, I will flag it and we will discuss how best to proceed, which may involve further fixed-fee work. That would be unusual.

Buying online forms the engagement on payment. The scope is what the settlement agreements for employers page describes, you accept the Terms of Service at checkout, and I email you within four working hours to get started. If you would rather ask something first, email me.

What you get

• A bespoke settlement agreement drafted for the exit you are dealing with
• Proper waiver of the relevant statutory claims, so the agreement does what you are paying for
• Advice on the tax treatment, including the £30,000 exemption and what falls outside it
• Confidentiality, non-derogatory statements and an agreed reference
• Reaffirmation or replacement of restrictive covenants, which is often the real value
• A short note on how to open the conversation and keep it without prejudice or protected
• One round of amendments after the employee's adviser responds

What is not included

• Advising the employee, which their own adviser must do independently for the agreement to be valid
• Tribunal representation if the matter does not settle
• Payroll processing of the settlement sums
• Handling the settlement payment, since I do not hold client money

Questions I am often asked

Our employee has been off sick for a year. Can we offer a settlement?

If the medical evidence supports it and adjustments and alternatives have been considered, yes, offered without prejudice or as one outcome of an open process. An offer based on the absence alone, without evidence, is a discrimination claim.

Can the whole payment be tax-free for an ill-health exit?

A payment made on account of the employee's injury or disability can be exempt without limit, beyond the usual thirty thousand pounds, where the conditions are met. The accountants confirm the treatment and the agreement states the basis.

The employee has income protection insurance through us. Does that matter?

It matters a great deal: the benefit usually ends with the employment, and may be worth more than any settlement. The employee must be told and advised before signing, and the agreement records that they have been.

Related guidance and services

• Settlement agreements for employers, £795, the service this page describes
• Employment contracts and handbooks, £595
• Shareholders agreement, £995
• Sickness absence policy
• Settlement agreement after a performance process

This page is general guidance for businesses in England and Wales, not advice on your own circumstances. Last reviewed: October 2026. Email geoffrey@caesar.co.uk.