How Much Is Ill Health Severance Pay?

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.

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.

 

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 is dependent on their capability to do their job. This will require you to prove that you have dismissed them because of their inability to perform their duties, as opposed to discriminating against them.

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.

An employee who is dismissed during sickness-related absence may also be entitled to full pay throughout their notice period, even where they have exhausted any entitlement to statutory or contractual sick pay.

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 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.

By way of example, where an employee’s contract provides for 4 weeks notice and an employee with 2.5 years service is dismissed on long-term sick leave, and their entitlement to sick pay has all been used up, 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 at 4 weeks is more than 1 week longer.

For the 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?

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 will also 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.

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

Can you make someone redundant due to ill health?

An employee cannot be made redundant due to ill health, although they can be fairly dismissed on grounds of capability, as long as the employer has acted reasonably in all the circumstances and made any reasonable adjustments within the workplace, wherever possible.

Is ill health severance taxable?

When ill health severance pay forms part of a settlement agreement to terminate employment on mutually agreed terms, typically the first £30,000 of any ex-gratia payment is not taxable. An ex-gratia payment refers to the payment provided by an employer to an employee as an incentive to sign the agreement.

What is ill health capability?

Ill health capability refers to an employee’s ability or inability to do their job by reason of sickness. By law, where an employee is incapable of performing work of the kind that they were employed to do, either adequately or at all, this amounts to potentially fair grounds for dismissal.

Last updated: 25 April 2023