Hi Wilbs,
Well I had a quick read of some of Simon Fowler's book 'Workhouse' and he says that workhouses did take "lunatics and simpletons" (words in book) and that some had specific parts for lunatic inmates.
He says:
"Almost every workhouse had a number of mentally ill and mentally disabled paupers amongst the inmates, who were, for the most part, harmless both to themselves and to their fellows."
It sounds as if they were allowed to stay, unless they became too violent, in which case they were admitted to the local county asylum. They were treated more or less the same as other inmates, and expected to work.
I haven't yet found out about whether they had to be paupers, but will be back when I have found some more information, Wilbs.
Bye for now,
Paulene

P.S. I did find details of the following book on amazon, which looks intersting - it also allows you to search the contents and some of the pages:
http://www.amazon.ca/Mental-Disability-Victorian-England-Earlswood/dp/0199246394Plus, a free one on google books:
The Workhouse System, 1834-1929 By M. A. Crowther