A Guide to Ill Health Capability Dismissal Payments: Legal Steps and Employer Best Practices

When a member of your team is off sick long-term or frequently absent due to poor health, it can have a big impact on your business. As an employer, you want to support your staff – but sometimes, an employee’s ongoing health issues mean they simply can’t perform their role. That’s where the question of an ill health capability dismissal payment and, more importantly, fair procedure for capability-based dismissal, comes in.

Taking steps towards dismissing an employee because of sickness or disability is never easy. It’s also legally complex, with significant risks if you don’t get it right. So, what counts as a fair dismissal for ill health in the UK? How do payments work? What does ACAS say about “ill health dismissal”? And what best practices should you follow as an employer in 2024 to keep your business protected?

In this guide, we’ll break down everything you need to know about ill health capability dismissal payments, the right process to follow, and the legal steps you need to take. By the end, you’ll have a clearer idea of your options, obligations, and how to keep both your business and your team safe.

What Is Capability Dismissal?

Under UK employment law, a “capability dismissal” means ending someone’s employment if they’re not able to do their job, either because of performance issues or, as we’ll focus on here, ill health.

Capability is one of five “potentially fair” legal reasons for dismissal in the UK. The other grounds are:

• Conduct (misbehaviour)
• Redundancy (job or business reasons)
• Illegality (it’s unlawful to continue employing them)
• Some other substantial reason (miscellaneous category)

For a dismissal to be fair, you must base your decision on evidence and follow a reasonable procedure. If the issue is health-related, this means genuinely investigating whether the employee is capable of returning to work before deciding to end their employment.

What Is a Medical Capability Dismissal?

A medical capability dismissal (sometimes called “dismissal on grounds of capability due to ill health”) specifically refers to ending an employment contract because the employee is unable, due to medical reasons, to do the job you need them to do.

Typical scenarios include:

• An employee is signed off work for a prolonged period by their GP with little or no prospect of recovery.
• A pattern of frequent short-term absences means the role cannot be carried out reliably.
• You’ve already tried reasonable adjustments or a phased return, but these haven’t succeeded.

Employers sometimes feel stuck – you want to be fair, but you need to keep your business running. The law recognises this, but also sets out clear rules: dismissing someone for health reasons is possible, but there’s a strict process to follow to avoid an unfair dismissal claim.

What’s the Legal Framework for Ill Health Capability Dismissal?

The key legal rule is that a dismissal for ill health may be fair if you follow a reasonable process, and the employee genuinely can’t perform their duties due to health reasons.

Here’s what you must consider:

• Employment Rights Act 1996 (ERA): This is the main law governing unfair dismissals. It says dismissals based on “capability” (including health) are potentially fair, but only if handled reasonably.
• Disability Discrimination (Equality Act 2010): If the illness is long-term and substantially affects their daily life, it may legally count as a disability. That triggers extra obligations: you have to consider making “reasonable adjustments” to allow the employee to stay in work before moving to dismissal.
• ACAS Code of Practice: ACAS (the Advisory, Conciliation and Arbitration Service) provides a best practice code for handling dismissals, including those due to ill health. They recommend consultation with the employee, independent medical assessment, and exploring all alternatives to dismissal.

Employment law shifts regularly, especially with ongoing updates to health and discrimination law in the UK. Be sure to keep up with key changes. When in doubt, seek employment law advice from the experts.

Key Steps Under the Legal Framework

• Document all absences and communications (this forms vital evidence).
• Consult with the employee about their illness, prognosis, and possible adjustments.
• Obtain up-to-date medical reports (with the employee’s consent) – ideally from both the GP and an independent occupational health specialist.
• Consider reasonable adjustments such as flexible hours, changes to duties, or workplace modifications.
• Follow a fair sickness absence procedure and provide warnings if appropriate.
• Explore alternative roles within the business if possible.
• Only dismiss as a last resort, after all options have been considered and documented.

What Is an Ill Health Capability Dismissal Payment?

If, after a fair and reasonable process, you reach the stage of ending employment, you’ll need to calculate what payment your employee is entitled to.

Statutory Payments You May Need to Provide

• Notice Pay:
  Employees have the right to receive statutory notice pay (or their contractual notice, if that’s longer). You can only make a payment in lieu of notice (PILON) if your employment contracts allow for it.
• Accrued Holiday Pay:
  You must pay for any unused, accrued statutory holiday entitlement up to the termination date – whether or not they’re currently able to work.
• Sick Pay:
  Employees may be entitled to Statutory Sick Pay (SSP) up to the date of dismissal, or Occupational Sick Pay if you offer it. Check employment contracts and your sickness absence policy.
• Statutory Redundancy Pay:
  This usually won’t apply, because a capability dismissal is not redundancy – but double-check if there are job losses due to restructuring.

The phrase “ill health capability dismissal payment” is not a specific legal payment. Instead, you must pay all sums due under the contract (notice, unused holiday, unpaid sick pay), but there is no “automatic” extra compensation unless you also offer one under a settlement agreement.

Sometimes, if the dismissal could be open to challenge (for example, there’s an arguable disability discrimination issue), you might negotiate a termination settlement to avoid a tribunal claim. This would be set out in a legally-binding settlement or compromise agreement with a defined payment.

What Are the ACAS Guidelines on Ill Health Dismissal?

ACAS provides step-by-step guidance for handling long-term or repeated sickness absences fairly and lawfully. They set the gold standard for UK employers.

ACAS recommends:

• Talking to the employee early and regularly about their health, support needs, and return-to-work prospects
• Keeping thorough records and correspondence
• Consulting doctors and occupational health where necessary
• Trying reasonable adjustments (especially if a disability may be involved)
• Considering alternative work options or redeployment first
• Giving the employee the opportunity to be accompanied to meetings and reply to medical evidence before making any decision
• Exploring all alternatives, and only considering dismissal on medical grounds as a last resort

Following the ACAS code isn’t itself law, but tribunals often look at whether you did follow it. If you don’t, your risk of an unfair dismissal claim rises sharply – and you’re more likely to lose.

What Counts As a Reasonable Adjustment Under the Equality Act?

If the illness is long-term and meets the definition of a “disability” under the Equality Act 2010, you must consider making reasonable adjustments to help them stay in or return to work before dismissing.

Examples include:

• Modified duties or reducing hours
• Providing specialist equipment or support
• Adapting workplace layout or location
• Allowing remote work or phased returns

You don’t have to create a whole new job, but you should be prepared to show you tried alternatives and talked with medical professionals. If you skip this step, any resulting dismissal may be automatically unfair and discriminatory. For more information, see our advice on employers’ liability when making workplace decisions.

How Should Employers Handle Medical Capability Dismissals?

A fair dismissal “on grounds of capability due to ill health” in the UK is grounded in process. Here’s a summary of best practice steps:

1. Monitor and record absences: Keep track and look for patterns. Consider policies for absence triggers and review.
2. Consult the employee: Have honest, supportive conversations about their health and work prospects. Let them explain their side and what help they might need.
3. Obtain medical evidence: With consent, get reports from their GP and (crucially) an independent occupational health or other specialist. Don’t rely solely on your own opinions.
4. Assess reasonable adjustments: Consider and attempt any reasonable workplace changes or flexible work options first.
5. Consider redeployment: Are there other roles in your business that may suit the employee? Explore this and keep a clear record.
6. Hold a formal meeting: If, after all of the above, the employee still can’t do their role, invite them to a formal hearing (with the right to be accompanied). Provide copies of all evidence ahead of the meeting.
7. Make a decision and confirm it in writing: Clearly set out the reasons, the payments due, and the right of appeal.

If you miss any of these steps, or rush to dismissal without genuinely exploring alternatives, you drastically increase the risk of an unfair dismissal claim at an employment tribunal.

For more on the steps for ending contracts generally, see our guide on ending a contract.

What Are the Risks of Getting a Medical Capability Dismissal Wrong?

Dismissing on grounds of capability due to ill health can expose your business to legal challenge – especially if you haven’t followed a proper procedure. Risks include:

• Unfair Dismissal Claims: Employees with over 2 years’ service have the right not to be unfairly dismissed unless you can show you acted fairly and reasonably.
• Disability Discrimination Claims: Dismissing a disabled employee without first making reasonable adjustments can lead to unlimited compensation claims (not capped like unfair dismissal), plus injury to feelings damages.
• Reputational Harm: Handling illness-based dismissals insensitively can damage your employer brand, affect staff morale, and make recruitment harder.
• Tribunal Costs: If a claim is made, defending it can be time-consuming and costly, even if you win.

In short: always ensure your employment contracts and policies are clear, and that you seek advice before taking any dismissal decision.

Should You Offer a Settlement Agreement on Medical Dismissal?

It’s common for employers to offer a settlement – sometimes called an “ill health severance payment” – to resolve any legal disputes and obtain the employee’s agreement not to bring a tribunal claim.

Settlement agreements should always be drafted with care and involve legal advice (for both sides). The terms might include:

• A payment over and above basic contractual entitlements (“ex gratia”)
• A reference
• Mutual confidentiality and non-derogatory clauses
• Signed employee waiver of claims (must have had independent advice)

You can read more about ending contracts by agreement in our guide.

How Can You Reduce the Risk of Unfair Dismissal Claims?

To protect your business, make sure you:

• Follow your sickness absence and disciplinary procedures to the letter
• Keep detailed records at every stage
• Consult the employee and seek their input on adjustments
• Get proper medical advice, not just “hunches” or assumptions
• Seek professional legal advice before issuing notice

It’s wise to review your staff handbook and policies regularly and ensure your managers are trained on equality, discrimination, and sick leave law.

Are There Any 2024 Updates on Medical Capability Dismissal?

Employment law is always evolving. Recent years have seen growing emphasis on mental health as well as physical disability, including formal recognition of new conditions (for example, “long-Covid” and chronic fatigue) as potential disabilities under the Equality Act. Also, remote and flexible working arrangements, which expanded during the pandemic, are now increasingly expected as reasonable adjustments.

The key trend is towards a more proactive, supportive and consultative approach. As we move through 2024, keep a close eye on:

• Any changes to disability definitions or guidance on “reasonable adjustments”
• Case law on fair versus unfair process in mental health versus physical health dismissals
• Updates to ACAS codes and statutory minimum notice or pay rules

Key Takeaways

• You can lawfully dismiss an employee on the basis of ill health capability only if you follow a fair process and genuinely consider alternatives first.
• Always keep thorough records, consult the employee, and get independent medical evidence before making decisions.
• If the illness is a disability, consider – and where possible implement – reasonable adjustments as required by law.
• The final payments due on an ill health capability dismissal will usually include notice (or PILON), accrued holiday, and any sick pay owed – not a special “capability dismissal payment”, unless settled by agreement.
• Carelessly handled capability dismissals risk unfair dismissal or discrimination claims, with significant cost and reputational damage.
• Take legal advice before starting or concluding a medical capability dismissal, especially if in doubt about your obligations or best practice.
• Regularly review your employment contracts, sickness absence processes, and staff handbook to ensure compliance with current law.

If you’d like tailored legal advice, or help reviewing your contracts and procedures for ill health capability dismissal, you can reach us at team@sprintlaw.co.uk or +44 204 525 7497 for a free, no-obligations chat.