Settlement agreements when you are off sick

Which situation are you in?

Find your row first. The middle column is the statute that governs it; the third is what that difference does to you.

The capability route

Most people assume that being dismissed because you are ill is either obviously unlawful or obviously fine. It is neither. The statute gives it a name and a place.

Health is written into the definition

Capability is assessed by reference to skill, aptitude, health or any other physical or mental quality. So an employer who dismisses because a long illness means you cannot do the job is relying on one of the potentially fair reasons in s.98(2) — not on misconduct, and not on a redundancy.

A fair reason is not a fair dismissal

Having a potentially fair reason only gets the employer to the second stage. The tribunal then asks whether, in the circumstances — including the size and administrative resources of the employer’s undertaking — the employer acted reasonably in treating it as a sufficient reason to dismiss. That is where medical evidence, consultation, alternatives and timing do their work, and where most of the leverage in a capability case sits.

What the capability route does not give you

It is ordinary unfair dismissal. That means the normal qualifying service requirement of 2 years, the three-month time limit, and the unfair dismissal cap on the compensatory award. If that is the only route open to you, the settlement is priced against a capped claim.

The disability route

If your condition is a disability in law, a second and structurally stronger route opens. Whether it is turns on two provisions, and both are short enough to read in full.

And what “long-term” means:

Three things people get wrong about the test

1. It is about effect, not diagnosis. The question is whether the impairment has a substantial and long-term adverse effect on normal day-to-day activities, not what the condition is called.
2. “Likely to last” counts. You do not have to have been ill for 12 months already. It is enough that the effect is likely to last that long.
3. Recurrence counts, and so does the past. A recurring effect is treated as continuing, and s.6(4) applies the Act to someone who has had a disability.

What the disability route changes

No qualifying period of service. No statutory cap on compensation — EqA 2010 s.124(6) ties it to what a county court could award. A duty on the employer to make reasonable adjustments, whose failure is itself a claim. And injury to feelings on top, which an ordinary unfair dismissal claim does not carry.

Which is why working out whether you meet the s.6 test is the first thing worth doing, before any number is discussed. What else changes when a discrimination claim is in play.

The agreement has to cover it by name

A disability discrimination complaint is not settled by the Employment Rights Act. It needs either a contract made with a conciliation officer’s assistance or a qualifying settlement agreement, EqA 2010 s.144(4). A draft that lists a dozen claims under the 1996 Act and never mentions the Equality Act has not settled your disability claim. What the waiver list should contain.

Signing while you are signed off

Two separate questions tend to get tangled here, and they have different answers.

Is an agreement signed during sickness absence valid?

We have found nothing in the legislation that makes it invalid. The conditions for a valid settlement agreement are the same six conditions in s.203(3) whether you are at your desk or at home, and none of them refers to being fit for work. What does not change is the requirement for independent advice — you still need it, and your employer still usually pays for it.

Is it reasonable to be asked to decide quickly?

Often not. The Acas Code of Practice recommends allowing at least 10 days to consider a settlement agreement, and Acas is explicit that a disabled worker may need longer as a reasonable adjustment. If your condition affects your concentration, your energy or your ability to attend an appointment, that is a reason to ask for more time — and to say what the adjustment is for rather than simply asking for more days. Why a short deadline is the employer’s exposure, not yours.

The money that is specific to sickness

A settlement reached during long sickness absence has two money items that other settlements often do not, and both sit in the contractual half.

Holiday keeps accruing while you are off

GOV.UK’s employer guidance is unambiguous: statutory annual leave accrues while off sick, however long, and it can be taken during sick leave. After months of absence that can be a substantial figure. It is contractual money you were owed regardless of the settlement, it is taxed as earnings, and it is one of the most common items missing from a first draft.

Statutory Sick Pay, and when it stops

SSP is paid by the employer for up to 28 weeks, at the lower of a flat weekly rate or 80% of average weekly earnings. GOV.UK’s first eligibility condition is that you are classed as an employee — so once the employment ends the basis for it goes too, and the termination date in the agreement is in practice the date your statutory sick pay stops.

Income protection and permanent health insurance

If your employer provides income protection or permanent health insurance cover, leaving can end it. This is governed by your contract and the scheme rules rather than by statute, so there is no general figure for what it is worth — but for someone on long-term sickness absence it is exactly the kind of item a headline settlement figure does not show. It is a question to ask explicitly before agreeing a termination date, because once the employment ends the cover usually goes with it.

What the tribunal caseload says about this

Disability discrimination is not a niche claim. In April to June 2026 the employment tribunal received 4,051 disability discrimination complaints — the second largest category after unfair dismissal at 5,822 — and 15,592 were still open at the end of the quarter.

HMCTS management information for April to June 2026, covering cases on the Reform case management system and single claims only. It is not official statistics and the figures are provisional. The statistics do not separate ill-health capability dismissals from other unfair dismissals, so there is no published figure for those. Source: Tribunals statistics quarterly: April to June 2026, published 10 September 2026.

Why that matters to a negotiation

Every offer is priced against what refusing would cost the employer. A disability claim carries no cap and a large open caseload behind it; a capability claim carries a cap. The difference between the two is the difference between the two numbers you should be expecting. How to use that · run your own figures.

Common questions