Settlement Agreements and Long-Term Sickness

Written by: Owen John, Employment Law Partner, Darwin Gray | Last updated: 24/10/2026 | Reviewed by: Owen John

Key takeaways

• Employers sometimes offer a settlement agreement to employees on long-term sick leave, to resolve things without a drawn-out capability process.
• If your condition counts as a disability, you have extra protection, and dismissing you without proper steps could be discrimination.
• That protection can significantly increase what your settlement should be worth.
• Watch how the offer treats sick pay, benefits, pension, and any permanent health insurance.
• Don’t feel rushed. Being unwell doesn’t reduce your right to take proper advice first.

Why these offers come up

If you’ve been off work with a long-term illness or injury, your employer may at some point raise a settlement agreement. From their side, the alternative is often a long capability or ill-health process, with reviews, medical reports, and the risk of a claim at the end of it. A settlement lets them resolve things more cleanly, and gives you certainty and compensation rather than a drawn-out procedure.

That’s not necessarily a bad thing for you. A fair settlement can be a dignified way to move on, on agreed terms, with money in your pocket and your reference sorted. But, and this is the key point, long-term sickness cases carry extra legal protections, and those protections affect whether the offer in front of you is actually fair.

The disability discrimination angle

This is the most important thing to understand. If your condition meets the legal definition of a disability (broadly, a physical or mental impairment with a substantial, long-term adverse effect on your day-to-day activities), you have significant extra protection under the Equality Act.

That protection includes:

• The right to reasonable adjustments. Your employer must consider changes that would help you stay in or return to work, before even thinking about dismissal.
• Protection from disability discrimination. Dismissing you because of, or for reasons connected to, your disability, without proper justification and process, can be unlawful.

If your employer is offering a settlement instead of properly exploring adjustments or following a fair process, there may be a discrimination claim in the picture. And because discrimination compensation is uncapped, that can substantially increase what a fair settlement looks like. It’s often the single biggest factor in these cases.

What to check in the offer

Beyond the discrimination question, long-term sickness settlements have some specific things worth looking at closely:

• Sick pay. Have you been paid everything you’re entitled to, contractual and statutory, up to the point of leaving?
• Permanent health insurance (PHI) / income protection. If your employer provides income protection cover, leaving employment could end it, sometimes a serious loss if you’re unable to work. This is easy to overlook and can be hugely valuable. It needs checking before you agree to anything.
• Pension and benefits, including any ill-health early retirement provisions.
• Medical confidentiality, how your health information is handled and described.
• The reference, so your absence is framed fairly for future employers.

The PHI point in particular catches people out. Giving up valuable long-term income protection cover for a modest lump sum is rarely a good trade, and it’s exactly the kind of thing we check.

Take your time

One more thing, and it matters. Being unwell can make you feel pressured to just get it over with, to sign and be done. Please don’t let that rush you. You’re entitled to proper time to consider any offer (the ACAS Code suggests at least 10 calendar days), and to independent advice, which your employer will usually pay for. If anything, these cases need more care, not less, because the protections and the financial stakes are higher. We’ll handle it at a pace that works for you.

Frequently asked questions

Can my employer offer me a settlement agreement while I’m off sick?

Yes. Employers often raise a settlement with employees on long-term sick leave, as an alternative to a lengthy capability or ill-health process. It’s not improper in itself, and a fair settlement can be a good way to move on. But these cases carry extra protection, particularly if your condition is a disability, so it’s important to check the offer is genuinely fair before agreeing. Don’t feel pressured to decide quickly.

Does being on long-term sickness affect my settlement value?

It can, significantly, especially if your condition counts as a disability under the Equality Act. If your employer hasn’t properly considered reasonable adjustments or followed a fair process, there may be a disability discrimination claim, and because discrimination compensation is uncapped, that raises what a fair settlement should be. The value also depends on things like lost income protection cover and your length of service. Specialist advice is key to knowing your position.

What happens to my income protection or PHI if I sign?

This is crucial to check. If your employer provides permanent health insurance or income protection, leaving your employment could bring that cover to an end, which can be a major loss if you’re unable to work. Swapping valuable long-term cover for a one-off lump sum is often a poor deal. Before agreeing to anything, make sure you understand what you’d be giving up. We check this routinely, because it’s so easy to miss.

I feel pressured to sign because I’m unwell. What should I do?

Take a breath, and take your time. Being unwell doesn’t reduce your rights, you’re still entitled to proper time to consider the offer (the ACAS Code suggests at least 10 days) and to independent legal advice, usually paid for by your employer. If anything, these cases deserve more care because the stakes are higher. A good solicitor will handle things at a pace that suits you and take the pressure off. You don’t have to rush this.

Talk to us in confidence

If you’ve been offered a settlement while off sick, we’ll check it’s fair, protect any income protection you’re entitled to, and tell you honestly whether you could do better. We’re Darwin Gray, one of Wales’ leading employment law firms. You’ll deal directly with a specialist solicitor, and as the only firm in Wales offering full Welsh language employment advice at every level, we can help in Welsh or English.

Get a free, no obligation chat with our employment team. Call 02920 829 100 or use our contact form.

Related information

Settlement agreements for employees

Discrimination and settlement agreements

How much should you get?

Negotiating a settlement agreement

Disclaimer: This guide is general information, not legal advice, and employment law changes. For advice on your situation, please speak to a qualified employment solicitor.

This website contains general information based on English and Welsh law and, although we endeavour to ensure that the content is accurate and up to date, users should seek appropriate legal advice before taking or refraining from taking any action. The contents of this site should not be construed as legal advice and we disclaim any liability in relation to its use.