Navigating difficult conversations: Medical Incapacity

Terminating an employee’s employment is one of the most challenging tasks for any employer. Even when justified—such as in cases of serious misconduct—these conversations are emotionally charged and complex, requiring careful consideration of legal obligations and the interests of all parties involved. The risk of legal challenges often leads employers to delay or avoid these discussions, hoping issues will resolve on their own. 

When no one is at fault, such as in cases of redundancy or medical incapacity, these conversations can become even more sensitive. Medical incapacity arises when an employee is unable to work due to illness or injury, with little to no prospect of returning in the near future. Employees are often focused on recovery, making discussions about potential termination difficult to process. 

Medical incapacity: Key considerations for employers 

When addressing medical incapacity, employers must act fairly and reasonably. This involves giving the employee a chance to recover, gathering relevant medical information, and considering all circumstances before making a decision. To guide this process, consider the following questions: 

1. How long should the employee be given to recover or provide a prognosis before termination is considered? 
2. What information is needed to make an informed decision? 
3. How should the employer engage with the employee throughout the process? 
4. Has the employee’s information been fairly considered? 
5. What outcome is reasonable, balancing the employee’s situation with the needs of the business? 

Employer’s Obligations 

Employers must be able to demonstrate they provided the employee with a reasonable opportunity to recover. What’s considered “reasonable” varies depending on a range of factors.  

Employers need to ensure that they have made reasonable efforts to obtain information relating to the employee’s incapacity. This information could come from GPs, specialist practitioners, or other relevant medical professionals.  

Effective, ongoing communication with the employee is also critical and a requirement of an employer’s good faith obligations. Employees, similarly, have a duty to engage with their employer. This means providing relevant information in a timely manner, and attending necessary meetings to discuss the information, impacts on the business, opportunities to accommodate recovery, and the possible ending of employment. 

There is no expectation on employers to hold a position open indefinitely. However, when terminating an employee for medical incapacity, employers need to be able to demonstrate they have considered all relevant factors and made a decision that is fair and reasonable in the circumstances. This means genuinely balancing the employee’s situation against the business needs.  

Genuinely considering the available information means more than simply calculating a timeframe for return. It requires assessing the likelihood of recovery within that period, any potential limitations upon return, and weighing all relevant factors against the needs of the business. 

For example, if a business can run effectively without an employee for a defined period with minimal operational or financial impact, dismissing them before that timeframe expires would likely be viewed unfavourably if the dismissal were challenged. However, if the costs of covering the absence are unsustainable, including if a business is spreading workload amongst other staff which could lead to possible burnout, the business will likely be justified in making that decision after working through the evaluation process.   

Case summary – Sheridan v Pact Group [2025] NZERA 1 

The Employment Relations Authority (“Authority”) recently released a determination providing helpful analysis of these factors in the context of a termination for medical incapacity.  

In this case, the employee went on sick leave in early February 2021. The employee remained absent from work for the next seven weeks. During this time, the absence was regularly extended through the provision of updated medical certificates.  

After several extensions, the employer wrote to the employee advising that she had been absent for a considerable length of time, and it was increasingly difficult to cover her shifts. The employer sought to meet with the employee to discuss her medical status, and advised her that certainty was needed about when she might be able to return to work. 

Exchanges took place over the subsequent two months, with the employer repeatedly requesting more information, and the employee insisting that a meeting couldn’t take place until an ACC report could be provided. This report was delayed on numerous occasions. Following each delay, the employer agreed to extend the timeframe for the meeting, but continued to insist that a meeting, and information, was needed so decisions could be made. 

On 23 June 2021, the employer wrote to the employee setting clear dates by which information was needed (8 July 2021), following which a decision would need to be made regarding the business’ ability to continue to hold the position open. The ACC report was provided on 15 July 2021, but further extensions were requested to allow the employee an opportunity to provide this information to specialists so a return-to-work plan could be formulated. Further exchanges occurred through to 20 July 2021, when the employer made a preliminary decision to terminate the employee’s employment for medical incapacity. This decision was made on the basis that it could no longer hold the role open without necessary timeframes being provided. The employee was given until 23 July 2023 to respond to the preliminary decision, following which a final decision would be made. The employee provided no further comment, and the decision was finalised on 28 July 2024.  

The employee subsequently raised a personal grievance for an unjustified dismissal on the basis that she considered the process followed, and decision made, were unreasonable in the circumstances. 

The Authority found the employer’s actions and decision were fair and reasonable. The Authority made this decision taking into account, among other factors: 

• The allowance of nearly six months before making the decision.  
• The extensive efforts made by the employer to obtain information and engage with the employee.  
• The employer’s efforts to cover the absence with other staff working additional hours/shifts.  
• The employer’s need to have a permanent solution. 
• Alternatives were not reasonable feasible, in part due to the skills required for the role, the limited labour market where the business operates, and the uncertainty about timeframes the employer could offer to anyone who could potentially cover the absence. 

How should employers approach situations involving extended or frequent absences? 

It’s important to remember that, most of the time, no one is at fault in situations involving potential medical incapacity. Handling these situations is difficult, and every set of circumstances will be unique, meaning there will always be a need to manage the process, communication, and decisions with respect and with a level of flexibility that allows all parties to feel as though they have been treated fairly and reasonably.  

If in doubt, seek specialist advice and assistance prior to commencing any processes that may become contentious, to ensure you’re mitigating against the likelihood of missteps exposing you and your business to risk.  

For further advice on managing employment processes effectively, DTI Lawyers specialist employment lawyers are available by phone on 07 282 0174 or email [email protected].