Sick Leave & Health Guide
Settlement Agreement on Sick Leave: UK Employee Rights and Pay (2026 Guide)
Under UK employment law, your employer can legally offer you a settlement agreement while you are on sick leave. You are under no obligation to accept the offer or leave your job. In 2026, a fair settlement should include full normal pay for your notice period under Sections 87 to 91 of the Employment Rights Act 1996. This applies even if you currently receive Statutory Sick Pay or nil pay. Genuine termination compensation is tax-free up to £30,000 under Section 403 of ITEPA 2003. Your employer covers the cost of your independent legal advice. You can check what your exit package should look like using our free settlement calculator.
Key sick leave settlement facts for 2026
- Your employer can propose a settlement agreement during sick leave, but you do not have to accept.
- Under the statutory one-week rule in Sections 87 to 91 of the Employment Rights Act 1996, you are entitled to full normal notice pay, even on Statutory Sick Pay.
- Section 111A confidentiality does not apply to discrimination claims. If your illness qualifies as a disability, pre-termination talks are not secret.
- Ex-gratia termination payments are tax-free up to £30,000 under Section 403 of ITEPA 2003.
- Notice pay (PILON) is fully taxable as earnings under Section 402D of ITEPA 2003.
- You continue to accrue statutory holiday entitlement while on sick leave, which must be paid out in full upon exit.
- Your employer covers the legal fees for your independent solicitor, typically contributing £350 to £750 plus VAT.
Can an employer offer a settlement agreement while on sick leave?
Yes, an employer can legally propose a settlement agreement while you are on sick leave. They can contact you in writing or hold a meeting. However, you do not have to accept the offer, sign the document, or agree to leave. Sickness does not remove your statutory employment rights.
Receiving an exit proposal while dealing with a health condition can feel overwhelming. Many employees are signed off work with stress, depression, anxiety, physical injury, or a long-term condition.
Your employer cannot penalise you for refusing the proposal. You remain an employee with all contractual rights intact.
Why employers propose settlement agreements during sick leave
Employers often prefer a settlement agreement because managing long-term sickness absence is legally complex and time-consuming.
To dismiss an employee fairly on grounds of ill health, an employer must follow a rigorous capability procedure under Section 98 of the Employment Rights Act 1996 1. This process typically takes between three and nine months.
During a capability procedure, your employer must:
If an employer rushes this process, they face significant employment tribunal risks. Ordinary unfair dismissal compensatory awards are capped at £123,543 or 52 weeks of gross pay under SI 2026/310 2. You can explore how tribunals assess these claims in our guide to unfair dismissal settlement agreements or estimate potential awards with the unfair dismissal calculator.
Disability discrimination claims are completely uncapped under Section 124 of the Equality Act 2010 3. By offering a settlement agreement, your employer seeks to avoid procedural delays, legal uncertainty, and tribunal risk. You can compare both pathways in our detailed comparison of settlement agreements versus employment tribunal claims.
Notice pay on sick leave: the statutory one-week rule
Notice pay is one of the most contentious elements of a sick leave settlement. Employers often calculate notice pay using your current sick pay rate, such as Statutory Sick Pay (SSP) or nil pay. In many cases, this calculation is legally incorrect.
Sections 87 to 91 of the Employment Rights Act 1996 establish statutory pay protections during notice periods 4.
The crucial legal test is the statutory "one-week rule" set out in Section 87(4) of the Employment Rights Act 1996:
How Section 87(4) protects your notice pay
Section 86 sets statutory minimum notice: one week for service between one month and two years, plus one additional week for each complete year of service up to twelve weeks 5.
Under Section 87(4), statutory pay protections apply if your contractual notice is not at least one week longer than your statutory notice entitlement.
When this condition is met, Section 88(1)(b) states that an employee incapable of work due to sickness is entitled to full normal contractual pay for their notice period. This applies even if you have exhausted contractual sick pay and receive only SSP or zero pay.
Scenario A: Contractual notice matches statutory notice
You have five years of service (five weeks statutory notice). Your contract requires five weeks or one month of notice.
Your contractual notice is not at least one week longer than statutory notice. You are legally entitled to 100% full pay for all five weeks of notice.
Scenario B: Contractual notice exceeds statutory by 1+ weeks
You have two years of service (two weeks statutory notice). Your contract requires three months of notice.
Section 87(4) excludes you from statutory full pay. Notice follows your contract, but your solicitor will negotiate full pay in the settlement agreement.
If your employer calculates your Pay in Lieu of Notice (PILON) using SSP or nil pay, point out Sections 87 and 88 of the Employment Rights Act 1996. Your independent solicitor will ensure your notice pay reflects your true legal entitlement. Read our guide to PILON tax treatment in 2026 to understand how notice pay is taxed.
Disability discrimination protections under the Equality Act 2010
Many health conditions that cause long-term sick leave meet the legal definition of a disability under UK law.
Under Section 6 of the Equality Act 2010, a disability is defined as a physical or mental impairment that has a substantial and long-term adverse effect on your ability to carry out normal day-to-day activities 6.
An effect is considered "long-term" if it has lasted for at least 12 months, is likely to last for at least 12 months, or is recurring. Conditions that frequently qualify include:
Section 15: Discrimination arising from disability
Under Section 15 of the Equality Act 2010, your employer cannot treat you unfavourably because of something arising in consequence of your disability 7. Sickness absence is a direct consequence of your illness.
If your employer initiates dismissal proceedings or pressures you to resign because of your absence, this can constitute unlawful discrimination. The employer can only defend this if they demonstrate that their action is an objective, proportionate means of achieving a legitimate aim.
Section 20: Duty to make reasonable adjustments
Under Section 20 of the Equality Act 2010, employers have an active legal duty to make reasonable adjustments 8. This duty arises before considering an employee for capability dismissal.
Adjustments may include a phased return to work, reduced hours, adjusted duties, working from home, or transferring to an open role. If your employer proposes a settlement without exploring adjustments, their legal exposure increases significantly.
Uncapped compensation and Vento bands
Unlike ordinary unfair dismissal, compensation for disability discrimination under Section 124 of the Equality Act 2010 is uncapped.
Tribunals also award compensation for injury to feelings based on the Ninth Addendum Vento bands (applicable from 6 April 2026): Lower Band (£1,300 to £12,600), Middle Band (£12,600 to £37,700), Upper Band (£37,700 to £62,900), and Exceptional Cases (exceeding £62,900) 9.
This potential uncapped exposure provides strong justification for an enhanced financial settlement. Read our comprehensive guide on discrimination settlement agreements for further detail.
Why Section 111A protected conversations do not protect employers during sick leave
When proposing an exit, employers often label discussions as a "protected conversation" under Section 111A of the Employment Rights Act 1996 10.
Many employers believe this label guarantees total confidentiality. Under UK law, Section 111A confidentiality has strict limits.
1. Section 111A does not apply to discrimination claims
Section 111A confidentiality applies solely to ordinary unfair dismissal claims. Under Section 111A(4), it does not apply to claims brought under the Equality Act 2010, whistleblowing disclosures, or breach of contract.
If your health condition is a qualifying disability, the settlement meeting is not protected. You can refer to everything your employer said or proposed in an employment tribunal claim.
2. Improper behaviour removes all confidentiality
Under Section 111A(4), confidentiality is void if an employer engages in "improper behaviour".
Examples of improper behaviour during sick leave include:
- Pressuring you to sign while you are medically unfit or heavily medicated.
- Giving you an unreasonably short deadline, such as 24 or 48 hours. The ACAS Code of Practice recommends a minimum of 10 calendar days.
- Threatening to stop your sick pay or fire you immediately if you decline the offer.
- Contacting you repeatedly despite medical notes stating you are unfit for work-related contact.
If your employer acts improperly or pressures you to accept without adequate time, their confidentiality disappears. You can learn more in our guides to employer pressure and the ACAS 10-day rule and protected conversations and without prejudice rules.
Medical reports and the Access to Medical Reports Act 1988
During sickness absence, employers frequently ask to contact your GP or send you to an occupational health doctor.
You have clear statutory rights regarding your private medical information under the Access to Medical Reports Act 1988 (AMRA) 11:
Your legal rights under AMRA 1988
- Your employer cannot contact your GP or medical specialist without your explicit written consent.
- You have the legal right to inspect the medical report before it is sent to your employer.
- You can request that your doctor amend or delete any information you consider incorrect or misleading.
- You have the right to withdraw your consent at any time before the report is supplied to your employer.
An employer can ask you to attend an occupational health assessment. While they can request this, they cannot force you to attend if your doctor advises that doing so would harm your health.
One advantage of negotiating a settlement agreement is that it removes the need for stressful medical examinations. Once financial terms are agreed, further medical investigations cease.
Settlement Agreement vs Capability Dismissal on Sick Leave
Compare the two primary routes an employer can take when an employee is on prolonged sick leave:
| Feature | Settlement Agreement | Capability Dismissal |
|---|---|---|
| Outcome | Mutually agreed exit package | Unilateral dismissal by employer |
| Timeline | Typically 1 to 3 weeks | 3 to 9 months of capability hearings |
| Financial package | Enhanced ex-gratia compensation + full notice pay | Contractual or statutory notice pay only |
| Tax advantages | Up to £30,000 tax-free under ITEPA s.403 | No tax-free compensation package |
| Future reference | Agreed, binding written reference clause | Standard factual reference noting dismissal |
| Legal fees | Your employer covers the legal fees (£350 to £750+ VAT) | You pay own legal costs if appealing |
| Stress level | Immediate closure, focus on health recovery | Prolonged meetings, warnings, and uncertainty |
| Tribunal claims | All legal claims waived upon signing | You can lodge tribunal claims within 3 months less 1 day |
Unsure whether to accept or decline?
Declining a settlement offer does not mean immediate termination. Your employer must continue your contractual sick pay and follow a fair capability investigation.
Explore your strategic choices in our guides on what happens if you do not sign a settlement agreement and how to tell if your settlement offer is fair.
Tax treatment of sick leave settlement payments
Settlement payments consist of different financial components. Each component is treated differently for tax and National Insurance purposes.
A well-drafted settlement agreement clearly separates these elements:
Ex-Gratia Termination Payment
Under Section 403 of ITEPA 2003, genuine compensation for loss of employment is exempt from income tax and National Insurance up to £30,000 12.
Any excess above £30,000 is subject to income tax and employer National Insurance.
Notice Pay (PILON)
Under Section 402D of ITEPA 2003, Pay in Lieu of Notice is classified as Post-Employment Notice Pay (PENP) 13.
Your employer must deduct standard income tax and Class 1 National Insurance from all notice pay.
Accrued Holiday Pay and Sick Pay Arrears
Under Regulation 13 and 13A of the Working Time Regulations 1998, workers are entitled to 5.6 weeks of paid annual leave per year 14.
You continue to accrue statutory holiday while off sick. If your illness prevented you from taking holiday, it carries forward under retained case law (such as Stringer v HM Revenue and Customs) 15.
All outstanding holiday pay and sick pay arrears must be paid in full upon departure. These sums are treated as normal earnings and taxed under PAYE.
If your settlement includes compensation for pre-termination disability discrimination, that portion is 100% tax-free under Section 406 of ITEPA 2003, outside the £30,000 limit. Learn more in our complete guide to the £30,000 settlement tax exemption and read our benchmark analysis of average UK settlement agreement payouts.
What to do if you are offered a settlement agreement while off sick
Follow this step-by-step process to protect your rights, verify your pay, and achieve fair exit terms:
- 1
Request the proposal in writing
Do not accept or reject anything verbally during an unexpected phone call or meeting. Ask your employer to email the draft agreement and financial breakdown. - 2
Confirm your sick pay and accrued holiday
Check your payslips. Calculate your outstanding statutory holiday balance and any unpaid sick pay owed to your termination date. - 3
Check your statutory notice rights under the one-week rule
Review your continuous service and contract length. Determine whether Sections 87 to 91 of the Employment Rights Act 1996 entitle you to full normal pay for your notice period. - 4
Assess whether your condition qualifies as a disability
Review whether your condition meets the Section 6 Equality Act 2010 definition. A potential disability discrimination claim gives you substantial negotiating strength. - 5
Appoint an independent employment solicitor
Under Section 203(3) of the Employment Rights Act 1996, independent legal advice is mandatory. Your employer covers the legal fees, paying your solicitor directly. Remember that you do not have to use your employer's recommended solicitor. You can get matched with a specialist employment solicitor through our panel. - 6
Negotiate enhanced compensation and an agreed reference
Your solicitor will negotiate improved ex-gratia compensation, full notice pay, an agreed reference, and appropriate non-derogatory clauses. Follow our proven strategies in how to negotiate a settlement agreement. - 7
Sign only when satisfied and medically ready
Take the necessary time to review the final document. Sign only once your solicitor confirms that all tax terms and payment dates are fully protected.
Official independent resources
Access free, impartial guidance on sick leave and employment rights from official UK statutory bodies:
ACAS (Advisory, Conciliation and Arbitration Service)
Free, impartial guidance on sickness absence, settlement agreements, and early conciliation.
Equality Advisory and Support Service (EASS)
Official government helpline advising on disability discrimination under the Equality Act 2010.
GOV.UK Statutory Sick Pay
Official government guidance on SSP eligibility, rates, and employer obligations.
Legislation.gov.uk
Access original UK statutes including the Employment Rights Act 1996 and SI 2026/310.
Check your settlement offer now
Evaluate your offer against 2026 statutory caps (£751 weekly cap), calculate your notice pay, and verify your tax-free allowance.
Calculate my settlement now →Frequently asked questions
Can my employer force me to attend a settlement meeting while I am off sick?
No. Your employer cannot force you to attend meetings while signed off sick by your GP. If you are medically unfit, inform your employer in writing. You can ask for communications to remain in writing or instruct an independent solicitor to speak for you.
What happens if I reject a settlement agreement while on sick leave?
If you reject the offer, your employment contract continues as normal. Your employer must continue paying any sick pay you are entitled to. They must follow formal capability procedures if they wish to manage your absence, and cannot dismiss you simply for declining an offer.
Am I entitled to full pay during my notice period if I am on Statutory Sick Pay?
Under Sections 87 to 91 of the Employment Rights Act 1996, you are entitled to full normal pay during notice if your contractual notice is not at least one week longer than statutory notice. If your contract provides greater notice, pay depends on contractual terms, but your solicitor can negotiate full pay in the agreement.
Does my employer pay for my solicitor while I am on sick leave?
Yes. For any settlement agreement to be legally binding under Section 203(3) of the Employment Rights Act 1996, you must receive independent legal advice. Your employer covers this fee, typically contributing between £350 and £750 plus VAT directly to your solicitor.
How does sickness affect the calculation of my accrued holiday pay?
You continue to accrue statutory annual leave (5.6 weeks per year) throughout your sick leave under the Working Time Regulations 1998. If illness prevented you from taking your leave, your entitlement carries over. When your employment ends, all accrued, untaken holiday must be paid out in full at your normal pay rate.
Can my employer dismiss me for capability while we are negotiating?
An employer must follow a fair, documented procedure before any capability dismissal. This includes medical evidence, consultations, and exploring reasonable adjustments. Threatening immediate dismissal to force you to sign an agreement is improper behaviour under Section 111A(4) of the Employment Rights Act 1996 and removes confidentiality.
How much compensation should I expect in a sick leave settlement?
A typical settlement package includes full notice pay, accrued untaken holiday pay, and an ex-gratia compensation sum representing one to six months of gross salary. If your illness qualifies as a disability under the Equality Act 2010, the settlement should also reflect potential tribunal awards under the Vento bands, which range from £1,300 to over £62,900.
Related Guides & Calculators
Settlement Agreement Calculator
Benchmark your settlement offer against 2026 statutory rates and tax exemptions.
Discrimination Settlement Agreements UK
Learn how disability discrimination creates uncapped compensation and Vento awards.
Protected Conversations & Without Prejudice
Understand Section 111A confidentiality limits and improper behaviour rules.
What Happens If You Do Not Sign?
Evaluate your options if you decline an offer, including capability procedure rights.
How to Negotiate a Settlement Agreement
Proven negotiation strategies, counter-offer tactics, and non-financial clauses.
Tax on Settlement Agreements: £30,000 Rule
How the £30,000 exemption works under ITEPA Section 403 and what qualifies as tax-free.
References and Legislation
- Employment Rights Act 1996, Section 98 (general fairness and capability dismissals)
- The Employment Rights (Increase of Limits) Order 2026 (SI 2026/310)
- Equality Act 2010, Section 124 (tribunal remedies and uncapped compensation)
- Employment Rights Act 1996, Sections 87 to 91 (rights of employee in period of notice)
- Employment Rights Act 1996, Section 86 (statutory minimum notice periods)
- Equality Act 2010, Section 6 (statutory definition of disability)
- Equality Act 2010, Section 15 (discrimination arising from disability)
- Equality Act 2010, Section 20 (duty to make reasonable adjustments)
- Presidential Guidance: Employment Tribunal awards for injury to feelings (Ninth Addendum, applicable from 6 April 2026)
- Employment Rights Act 1996, Section 111A (confidentiality of pre-termination negotiations)
- Access to Medical Reports Act 1988 (employee consent and rights of inspection)
- Income Tax (Earnings and Pensions) Act 2003, Section 403 (£30,000 threshold for payments on termination)
- Income Tax (Earnings and Pensions) Act 2003, Section 402D (post-employment notice pay rules)
- Working Time Regulations 1998, Regulations 13 and 13A (statutory annual leave entitlements)
- Stringer and others v HM Revenue and Customs (Case C-520/06) (holiday accrual during sickness absence)
Disclaimer: SettlementCheck is an independent information service and calculator platform, not a law firm. The content on this page is for general information only and does not constitute formal legal counsel. Use our free calculator to evaluate your settlement offer.