Private Sick Pay for Employees: Employer Guide

Private sick pay is a workplace term used to describe enhanced sick pay arrangements, usually delivered through employer-funded income protection insurance. It is not a legal category in UK legislation but a label employers use for insured or enhanced sick pay benefits. While Statutory Sick Pay provides only a limited safety net, private sick pay and income protection arrangements can offer longer-term financial protection for employees who are unable to work due to illness or injury. For employers, understanding how these policies operate, when they create contractual obligations and how they interact with wider HR processes is critical to managing absence lawfully and supporting staff effectively.

What this article is about:
This article explains how private sick pay works, the legal considerations for employers and the practical steps HR directors need to take when offering or administering income protection arrangements. It covers contractual risk, discrimination issues, insurer processes, data protection requirements and how these schemes fit into wider absence and capability management. The guide is written for UK-based employers and HR professionals who need clear, authoritative guidance on how to use private sick pay as part of a compliant and well-structured employment framework.

Private sick pay is not a statutory entitlement. It is provided either through employer-funded income protection insurance or as a contractual sick pay scheme funded directly by the organisation. Contractual sick pay can exist with or without income protection insurance. Because these arrangements sit outside legislation, employers have considerable freedom in how they design and implement them, but that flexibility also creates risk. Unclear terms can create unintended contractual rights, and inconsistent application can lead to discrimination or breach of contract claims. Employers must therefore ensure their policies, contracts and HR practices are aligned and legally robust.

Income protection policies typically provide a percentage of salary for a defined period after a waiting or deferred period. Payouts depend on strict insurer rules, evidence requirements and ongoing assessments of the employee’s medical capability. HR teams must understand that the employer is not the decision-maker; the insurer is. The employer’s responsibilities sit in communication, process management, contractual alignment, data protection compliance and adherence to employment law duties, including the Equality Act and obligations to make reasonable adjustments where disability is involved.

This guide sets out these responsibilities in detail and explains how private sick pay should be handled through the lifecycle of an employee’s absence, from initial application to return-to-work planning or, in some cases, lawful termination. It also clarifies how private sick pay interacts with statutory schemes such as SSP, disability-related adjustments and capability procedures, and when long-term sickness may lead to dismissal while insured benefits continue or potentially cease, depending on the underlying policy terms.

Section A: Understanding Private Sick Pay (Income Protection)

Private sick pay is a broad workplace term used in employment contexts to describe enhanced financial support during periods of illness or injury. For most UK employers, this benefit is delivered through an income protection insurance policy, which provides a structured and long-term replacement income to eligible employees once the insurer’s conditions are met. Although private sick pay schemes resemble contractual sick pay arrangements, they operate under different legal principles because payments depend on the insurer’s rules, not purely employer discretion. Private sick pay is not a statutory category in UK law, but rather a commercial benefit designed by employers. This section explains how the benefit operates, what it covers and where employers face legal exposure if policies are unclear or poorly administered.

A.1 What private sick pay covers

Income protection insurance is designed to replace a proportion of an employee’s salary if they are unable to work for medical reasons. Typical cover ranges between 50 and 80 percent of salary, depending on the scheme. Payments usually begin after a deferred period, which might be 4, 13 or 26 weeks, to reflect the employer’s own sick pay arrangements. Benefits may continue for a fixed term, such as two or five years, or until the employee reaches retirement age, depending on the policy.

The insurer, not the employer, determines eligibility for payment. Decisions are based on medical evidence, occupational assessments and the specific definition of incapacity set out in the policy wording. Many policies include exclusions, such as self-inflicted injuries, substance misuse or pre-existing conditions, and may require employees to follow treatment plans or attend assessments as a condition of ongoing payment. HR teams must therefore manage expectations and ensure employees understand the insurer’s role and discretion at the outset. Employers should avoid suggesting they can influence the insurer’s decision or that approval is guaranteed, as this may give rise to allegations of misrepresentation or breach of trust and confidence if the claim is declined.

A.2 Difference between private sick pay, statutory sick pay and contractual sick pay

Statutory Sick Pay (SSP) is a legal entitlement and must be paid by all qualifying employers for up to 28 weeks. Contractual sick pay is a term of employment set out in the employee’s contract or staff handbook and is funded directly by the employer. Contractual sick pay can exist even where no income protection insurance is in place and is governed by the express or implied terms of the employment contract.

Private sick pay, by contrast, is usually insurance-funded. It is not a statutory right and does not exist unless the employer chooses to provide it. Because income protection is a third-party benefit, employers cannot guarantee payment—only the insurer can. This distinction must be made clear in all staff documents to avoid inadvertently creating a contractual obligation for the employer to fund sick pay if the insurer declines a claim. The legal obligation is to pay SSP where the eligibility criteria are met, and any additional enhanced or insured benefits are a matter of contract and policy design.

A.3 When private sick pay becomes an employment contract term

Although private sick pay is normally a discretionary benefit, it can become contractual through express wording or implied through custom and practice. If employees are consistently told they “will” receive income protection benefits, or if written documents fail to reference insurer discretion, an obligation may arise to pay even where the insurer refuses. This creates significant financial exposure for the employer, particularly where long-term benefits are promised.

Incorporation by custom and practice generally requires that the benefit is clear, consistently applied over a significant period of time, and well known to employees such that they reasonably believe it is part of their terms and conditions. Tribunals look at whether the practice is regular, long-standing and certain. Where these elements are present, a discretionary benefit may, in practice, become an implied contractual term.

Employers must therefore ensure that contracts, handbooks and policy documents accurately state that benefits are conditional on insurer acceptance. Terms should also clarify that the employer retains discretion to amend or withdraw the scheme and that entitlement only continues while the policy remains in force. Failure to do so risks establishing an enforceable right to ongoing sick pay beyond the employer’s control and could expose the business to claims for breach of contract if payments stop while the employee reasonably believes they are contractually protected.

A.4 Employer business rationale for offering private sick pay

Income protection schemes are attractive to employers because they provide a structured, predictable and insured method of supporting employees on long-term sick leave. They improve recruitment and retention, particularly in competitive labour markets, and support wellbeing and workforce stability. They can also reduce pressure on managers by ensuring long-term absences are financially supported without the same level of direct cost borne by the employer after the deferred period.

From a financial perspective, private sick pay reduces uncertainty. Rather than funding extended periods of full or half pay directly from payroll, employers pay a fixed insurance premium. In sectors with higher absence risk, group income protection can also provide access to rehabilitation, occupational therapy and workplace adjustment support, which can assist return-to-work planning and reduce the length and impact of absences. When combined with a clear absence management framework and good HR governance, private sick pay can therefore form a key part of a sustainable and legally compliant people strategy.

Section A Summary
Private sick pay operates as a long-term income protection mechanism, delivered through insurance and controlled by policy conditions rather than statute. Employers must understand the definition of incapacity used by the insurer, the limits of their own obligations and the legal risks of unclear or inconsistent communication. Where the benefit is described or applied in a way that appears guaranteed, it may become an implied contractual term through custom and practice, significantly increasing employer liability. When structured correctly, however, private sick pay offers substantial organisational and employee benefits, supporting retention and wellbeing without creating unmanaged financial risk.

Section B: HR Responsibilities & Compliance

HR teams play a central role in managing private sick pay because they are responsible for ensuring the benefit is communicated accurately, administered consistently and aligned with wider employment law obligations. Although insurers make the final decision on whether payments are made, the employer controls the information flow, internal processes and contractual framework. Miscommunication or poor process management can expose employers to claims for breach of contract, discrimination or unfair treatment. This section sets out the core responsibilities HR directors must understand when managing income protection schemes, including data protection requirements under the UK GDPR and Equality Act duties.

B.1 Communicating private sick pay policies to employees

Clear communication is essential for managing expectations. Employees must understand that private sick pay is an insured benefit and that entitlement depends on the insurer accepting the claim. HR documents should avoid definitive statements such as “you will receive private sick pay” unless the employer intends to create a contractual right. Policies should instead explain that benefits are subject to insurer terms, medical assessments and ongoing compliance with the policy rules.

Staff handbooks, contracts and induction materials should also explain the deferred period, benefit level, duration of cover, eligibility requirements and any exclusions. HR teams should ensure there is no contradiction between contracts and benefits policies, as inconsistencies can lead to grievances or claims of misrepresentation. Consistent communication is particularly important during long-term absence where employee anxiety and misunderstanding may escalate if updates are not clear and timely.

B.2 Avoiding discrimination and equality issues

Income protection schemes must be implemented in a way that complies with the Equality Act 2010. Employers must ensure that eligibility or access is not discriminatory. For example, excluding part-time workers or specific roles without a legitimate and proportionate justification may lead to indirect discrimination claims.

Insurance-related age limits are another risk area. Many insurers cap cover at age 65 or 70, which may disproportionately affect older employees. Employers should assess whether this creates disadvantage and consider how to mitigate discriminatory impact. Disability discrimination risk is also significant. Long-term sickness absence may fall within the statutory definition of disability, triggering the duty to make reasonable adjustments. That duty arises once the employer knows or could reasonably be expected to know that the employee is disabled.

Adjustments may be required to support employees in engaging with insurer processes, such as providing additional time to gather medical evidence or allowing alternative communication methods. Decisions about access to benefits must be based strictly on policy wording, not subjective judgments about an employee’s health or capability.

B.3 Handling applications and claims

Although the insurer assesses claims, HR manages the process. This includes obtaining employee consent for medical information, gathering fit notes or occupational health reports and ensuring applications are submitted promptly. HR teams must maintain detailed records, as insurers often require updated medical evidence throughout the claim period.

Data protection compliance is essential. Health information is special category data under the UK GDPR, meaning employers must identify a lawful basis for processing and meet the conditions in Schedule 1 of the Data Protection Act 2018. Employers must minimise data handling, securely store documentation and only share information with the insurer where necessary and lawful. Retention periods must be clearly defined and applied consistently.

HR should manage communication between the employee and the insurer, explaining timelines, documentation requirements and what to expect at each stage. It is important to clarify that the employer cannot influence the insurer’s decision and that a refusal does not automatically create a right to continued sick pay from the employer unless contractually guaranteed. Misleading assurances may expose the employer to claims for misrepresentation or breach of trust and confidence.

B.4 Interplay with SSP and other statutory entitlements

HR teams must ensure statutory entitlements continue where required. SSP must still be paid unless the employee no longer qualifies, and employers must avoid creating gaps in statutory payments while awaiting an insurer decision. SSP cannot be withheld simply because an income protection claim is being assessed. HR must also ensure private sick pay is not wrongly treated as a substitute for statutory maternity pay, paternity pay, adoption pay or parental leave entitlements. Each of these rights must be managed separately.

Tax treatment must also be handled correctly. Employer-funded group income protection premiums are generally not a taxable benefit for employees and are treated as a deductible business expense. However, income protection payments made by the insurer are usually taxable as income through PAYE. Payments made directly by the employer outside the terms of the insurance scheme may also attract income tax and National Insurance liabilities.

Section B Summary
HR’s responsibilities extend far beyond passing information to the insurer. Employers must ensure clear communication, equality-compliant processes, secure and lawful handling of medical information and strict adherence to statutory pay rules. Effective HR governance reduces legal risks and ensures employees receive consistent, fair and transparent support during periods of long-term illness. By aligning contractual terms, policies and insurer processes, employers can maintain compliance while providing meaningful support to staff.

Section C: Structuring Private Sick Pay for Employment Contracts

The way private sick pay is reflected in employment contracts and policy documents is central to managing legal risk. Employers must decide whether income protection is a contractual benefit or a discretionary arrangement linked to the insurer’s terms. The drafting must be precise because careless wording can commit an employer to paying benefits even where the insurer refuses a claim. This section explains the key considerations when incorporating private sick pay into employment terms and how employers should manage insurer decisions and any future changes to the benefit.

C.1 Deciding whether to include private sick pay as a contractual benefit

Some employers choose to make private sick pay a contractual right to enhance their benefits package. This can strengthen recruitment and retention, particularly in senior or competitive roles. However, creating a contractual obligation means the employer is legally responsible for providing the benefit even if the insurer refuses to pay. In effect, the employer becomes the guarantor of the insurer’s decision.

Most organisations therefore structure private sick pay as a discretionary benefit, making it clear that payments depend entirely on insurer approval. This protects the employer from financial exposure and ensures liability does not arise when the insurer declines a claim due to exclusions, insufficient evidence or failure to meet the policy definition of incapacity. Employers should also consider whether eligibility will be restricted to certain roles, grades or service levels. Such restrictions are lawful provided they are objectively justified and do not unlawfully discriminate.

C.2 Drafting contractual terms

Where private sick pay is referenced in contracts or handbooks, the wording must be unambiguous. Key clauses should cover:

• Eligibility criteria, such as probationary periods, service length or job role
• Benefit level, expressed as a percentage of salary
• Deferred period before payments start
• Insurer discretion, explicitly stating that payments occur only if the insurer approves the claim
• Employee obligations, including providing medical evidence, attending assessments and complying with treatment recommendations
• Withdrawal or amendment rights for the employer, subject to consultation where required

Contracts must also specify whether the scheme is contractual or discretionary. Where the benefit is discretionary, employers should avoid language that implies guarantee. Handbooks should clearly state whether they are contractual or non-contractual, as ambiguity may lead to claims that handbook provisions form part of the employee’s terms and conditions.

Clarity is particularly important in light of case law such as Aspden v Webbs Poultry & Meat Group, where poorly drafted clauses led to an implied obligation to maintain income protection benefits even after dismissal. Employers must ensure there is no suggestion—express or implied—that they will personally fund benefits if insurer payments cease.

C.3 Managing insurer refusals or delays

Insurers may refuse a claim due to policy exclusions, insufficient evidence or failure to meet the contractual definition of incapacity. Employers must communicate these decisions promptly and accurately, signposting employees to the insurer’s appeals process. Employers should not give assurances or informal opinions on the likelihood of a successful appeal or imply that they can influence the insurer’s decision.

Where the insurer delays a decision, the employer must continue to pay SSP where applicable and, if relevant, contractual sick pay. Delays must not create gaps in statutory entitlements. It is also essential that HR teams manage expectations carefully. Incorrect statements may give rise to misrepresentation claims, breaches of trust and confidence or allegations that the employer acted outside the policy framework.

Employers are not generally required to fund sick pay if the insurer refuses a claim unless the wording of the employment contract or handbook creates a guaranteed entitlement. This risk underscores the need for precise drafting and consistent communication.

C.4 Changing or withdrawing private sick pay benefits

Employers may need to change the terms of private sick pay, such as adjusting benefit levels, changing insurer or withdrawing the scheme completely. If the benefit is contractual, changes require employee consent, and unilateral variation risks breach of contract or constructive dismissal. A structured consultation process is strongly recommended, supported by clear written documentation.

Where the scheme is discretionary, employers retain more flexibility but must still act fairly and in accordance with the implied duty of trust and confidence. Changes must be communicated clearly and implemented prospectively. Employees already receiving income protection benefits are usually governed by the policy terms in force at the time their claim was approved, and retrospective changes may not be legally enforceable.

Employers should also consider the risk of implied contractual terms through custom and practice. A benefit that has been consistently provided over a long period may create an expectation of continuation. Clear documentation and regular communication help reduce this risk.

Section C Summary
Private sick pay becomes legally risky when contracts and policies are unclear. Employers must decide whether the benefit is contractual or discretionary, draft precise wording and manage insurer decisions transparently. Employers must also avoid giving assurances that could amount to misrepresentation or create implied contractual obligations. With proper documentation, structured consultation and accurate communication, employers can offer valuable financial protection to employees without exposing themselves to unintended liabilities.

Section D: Managing Long-term Absence Where Private Sick Pay Applies

Private sick pay often becomes relevant during long-term absences, where employers must balance their legal obligations with the insurer’s requirements and the employee’s wellbeing. Effective management requires coordination between HR, occupational health, line managers and the insurer. Decisions must comply with employment law, respect insurer processes and ensure employees are treated fairly. This section explains how private sick pay integrates with absence management, workplace adjustments, return-to-work planning and, where necessary, lawful termination, including the specific risks that arise when income protection benefits may continue after employment ends.

D.1 Linking income protection to absence management policies

Absence management policies and income protection schemes must operate in tandem. Employers must ensure the timelines and evidence requirements in their absence policy are consistent with the insurer’s rules. For example, if the insurer requires updated medical reports every four weeks, the employer’s internal policy should reflect similar expectations to prevent delays.

When an employee enters long-term sickness, HR should issue clear written information explaining how the insurance claim process will work, what evidence is required and how long the deferred period will last. HR must also ensure fit notes, medical reports and occupational health input are gathered promptly, as insurers will not make decisions without this information.

If the employer delays submitting evidence, the insurer may delay or refuse payment, increasing the risk of grievances, Employee Relations disputes or allegations of unfair treatment. Efficient case management improves the likelihood of timely insurer decisions and supports continuity of SSP where applicable.

D.2 Workplace adjustments and disability considerations

Private sick pay often applies to employees with long-term health conditions that may meet the Equality Act 2010 definition of disability. Employers must therefore consider reasonable adjustments to facilitate continued employment or a return to work. Adjustments may include amending duties, changing hours, providing equipment or adapting working arrangements. The duty to make reasonable adjustments arises when the employer knows or reasonably ought to know that the employee has a disability.

Some insurers offer rehabilitation or occupational therapy support as part of their product. These services may include physiotherapy, cognitive behavioural therapy, vocational assessments or access to specialist clinicians. HR should work collaboratively with the insurer to integrate these services into the employee’s support plan.

Even where an employee cannot return immediately, adjustments may still be necessary to support their engagement with the process, such as offering alternative meeting formats or flexible deadlines for providing evidence. Failure to make reasonable adjustments may expose the employer to discrimination claims, irrespective of the insurer’s decisions or involvement.

D.3 Return-to-work planning with income protection in place

A successful return-to-work process requires collaboration between the employer, the insurer and healthcare professionals. Many income protection policies include rehabilitation provisions designed to support graded return-to-work programmes, therapy or vocational retraining. These interventions often reduce the duration of absence and improve long-term outcomes.

HR should ensure that any return-to-work plan is evidence-based, risk-assessed and developed in consultation with the employee. Phased returns, altered hours and modified duties are common approaches. Employers must check the insurer’s rules, as some policies require employees to attempt a phased return to maintain eligibility for ongoing benefits.

Managers must be trained to handle phased returns sensitively. Poorly coordinated returns can result in relapse, renewed sickness absence or disputes about suitability. HR oversight helps ensure adjustments remain reasonable, proportionate and aligned with Equality Act obligations.

D.4 Termination of employment while income protection continues

Termination of employment during a period of private sick pay requires particular caution. Employees on long-term sick leave may also be disabled under the Equality Act, meaning dismissal decisions must be objectively justified and follow a fair capability process. Employers must consider medical evidence, adjustments, alternative roles and whether the employee could return to work within a reasonable timeframe.

Critically, income protection benefits may or may not continue after employment ends. Some policies contain “continuation clauses” allowing benefits to continue post-termination if the employee met the incapacity definition at the point of dismissal. Others terminate benefits immediately upon the end of employment. Employers must check the exact policy terms before beginning any capability process. Failure to do so can expose the organisation to claims for breach of contract or constructive dismissal, particularly in light of case law such as Aspden v Webbs Poultry & Meat Group, where the employer was found to have dismissed an employee in a way that improperly undermined their entitlement to benefits.

A lawful capability dismissal requires consultation, medical evidence, a fair assessment of alternative roles, consideration of reasonable adjustments and documented decision-making. Employers must also avoid taking any action that appears designed to prevent an employee from accessing insurance benefits, as this may give rise to a breach of trust and confidence claim.

Section D Summary
Private sick pay interacts with every stage of long-term absence management. Employers must align absence policies with insurer rules, uphold Equality Act duties, support rehabilitation and ensure any dismissal decisions are lawful and based on robust medical and procedural evidence. Because some income protection benefits may continue after employment ends, HR must always review policy terms before commencing a capability process. Effective coordination reduces legal risks and supports positive outcomes for both the employee and the organisation.

FAQs

1. What is private sick pay for employees?

Private sick pay is financial support provided through an employer-funded income protection insurance policy. It replaces part of an employee’s salary during long-term sickness absence once the insurer approves the claim. Payments depend entirely on the insurer’s assessment of incapacity and medical evidence. Private sick pay is not a statutory right and does not exist unless the employer offers it through contractual terms or a discretionary policy.

2. Is private sick pay compulsory for UK employers?

No. Employers are not legally required to provide private sick pay. The only compulsory sick pay obligation is Statutory Sick Pay (SSP), which must be paid for up to 28 weeks to eligible employees. Private sick pay is an optional benefit used by some employers to support staff and strengthen their benefits offering.

3. Do employees get private sick pay automatically?

No. Employees do not automatically qualify for private sick pay. Entitlement only arises if the employer has arranged income protection insurance and the employee meets the policy conditions. The insurer must approve the claim before payments begin. Employers must make this clear in their documentation to avoid unintentionally creating a contractual obligation to fund the payments themselves if the insurer declines a claim.

4. What happens if the insurer refuses to pay?

If the insurer refuses a claim because the employee does not meet the policy definition of incapacity, due to exclusions or insufficient medical evidence, the employer is not normally required to fund sick pay themselves. Employers must communicate the refusal clearly and direct the employee to the insurer’s appeals process. Only if the employer has created a contractual promise of sick pay might liability arise, such as through poorly drafted contract terms or long-term custom and practice.

5. Can an employer dismiss someone receiving private sick pay?

Yes, but only through a fair and lawful capability process. Employees receiving income protection benefits may also be disabled under the Equality Act 2010, and employers must consider reasonable adjustments, medical evidence, alternative roles and rehabilitation options before dismissal. Employers must also review the insurance policy carefully: some policies allow benefits to continue after dismissal, while others terminate payments when employment ends.

6. Does private sick pay affect entitlement to SSP or other benefits?

No. Private sick pay does not replace statutory entitlements. SSP must be paid while the employee meets the statutory qualifying conditions, even if a private sick pay claim is being assessed or is expected to begin. Private sick pay also does not replace statutory maternity pay, adoption pay, paternity pay or parental leave rights. These statutory schemes operate independently and must be applied correctly regardless of any insured benefits.

7. Are employers required to fund private sick pay if the insurer declines a claim?

No, unless the employer has created a contractual obligation to do so. If contractual wording, handbooks or communications imply that the employer will provide sick pay regardless of insurer approval, the employer may become liable. Otherwise, the responsibility to pay sits solely with the insurer. Clear drafting and consistent communication are essential to avoid unintended liability.

Conclusion

Private sick pay can provide valuable long-term financial protection for employees who are unable to work due to illness or injury, but employers must structure and administer the benefit carefully to avoid legal and operational risks. Because income protection schemes rely on insurer decisions, employers must ensure that contractual wording, handbooks and policies all clearly state that benefits are conditional and subject to insurer approval. Failure to do so may unintentionally create binding contractual obligations requiring the employer to fund payments themselves.

For HR directors, the core responsibilities lie in clear communication, accurate policy drafting, consistent administration and strict compliance with employment law. Income protection sits alongside statutory rights, Equality Act duties, capability processes and occupational health involvement. When these elements operate cohesively, employers can offer meaningful support to staff while managing risk appropriately.

Effective management requires an understanding of insurer processes, including medical evidence requirements, rehabilitation support and policy exclusions. HR teams must also ensure secure handling of medical data under the UK GDPR, maintain statutory payments such as SSP during assessment periods and implement reasonable adjustments for employees with disabilities.

Private sick pay should be integrated into a wider absence management strategy that promotes fair processes, supports rehabilitation and ensures decisions—particularly those relating to dismissal—are grounded in medical evidence and lawful procedure. Reviewing the policy terms before starting any capability process is essential, especially where income protection benefits may continue post-termination under continuation clauses.

With well-drafted documentation, employee-centred communication and compliance-led HR practice, private sick pay can strengthen workforce stability, reinforce employer reputation and support long-term organisational wellbeing. This guide provides employers and HR directors with a framework for delivering these benefits safely, transparently and in line with UK employment law.

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