Medical Incapacity Termination – A Quick Guide for N.Z Employers
Medical incapacity is not well-understood by employers and involve some complex areas of employment law. A medical incapacity process requires careful planning and due diligence before terminating an employee’s employment on medical, or health grounds.
When an employee’s illness or injury affects their ability to perform the requirements of their role, employers must balance operational needs with legal obligations under the Employment Relations Act2000 (‘the Act’) and good faith duties. Getting the process wrong can expose an employer to costly personal grievances for unjustified dismissal, compensation awards, and reputational harm.
Grounds for Medical Incapacity Termination
Medical incapacity arises when an employee’s physical or health condition(s) prevents them from performing the requirements of their role, either temporarily or permanently. It is a separate justification from misconduct or performance issues, and dismissal based on medical incapacity must be carefully substantiated and procedurally fair.
Like other forms of employee termination, a fair, thorough and documented process is required before terminating employment due to medical incapacity.
Key points:
The employee’s incapacity must affect the core requirements of their role.
Employers cannot simply rely on medical certificates showing absence; they must understand how the medical condition impacts work and seek the provision of comprehensive medical information.
Employers need to consider any reasonable accommodations and allow the employee a fair opportunity to recover and return to work.
Employer Pro has a comprehensive Employer Toolkit available for managing a ‘Medical Incapacity and Disengagement Process’, including step-by-step guidelines, practical walk-throughs, legal commentary, various employer-focused template letters for scheduling formal consultation meetings and more to implement the correct process.
Substantive and Procedural Fairness Considerations
A dismissal for medical incapacity must satisfy both:
Substantive Justification
The employer must show a fair and reasonable employer could conclude (based on the information available at the time) that it is unable to continue to keep the employee’s position open and accommodate the employee’s absence, that the employee was provided a fair opportunity to recover and that no suitable alternative or accommodation could reasonably be implemented.
Consider:
Functional requirements of the position and operational impacts.
Medical prognosis, medical evidence, recovery likelihood and timeframes.
Alternative roles or modifications such as adjusted duties, part‑time hours, gradual return to work, etc need to be genuinely explored.
There is no fixed timeframe for determining when an employee’s continued absence becomes sufficient to warrant termination of employment. Each situation turns on its facts. Typically, employers should accommodate an employee’s absence from work for a minimum of three months to allow them a fair opportunity to recover before implementing a medical incapacity process, including terminating employment on this basis.
Procedural Justification
This means giving the employee meaningful opportunity recover, ensuring they understand related concerns, are given the opportunity to comment on any proposed outcomes, including termination of employment on medical grounds, and provide comprehensive medical information about their medical prognosis.
Employers must genuinely engage and not pre-determine the outcome, along with ensuring a corresponding paper trial to support the employer’s process exists.
Key steps include:
Early, clear communication about concerns and the process to be followed.
Requesting current, detailed medical evidence (with consent), i.e. a medical report.
Advising the employee of their legal rights, including potential outcomes for their employment.
Considering any reasonable accommodations and/or return to work arrangements.
Following consultation and fair process requirements, including compliance with any internal policy requirements, or procedures.
Keeping accurate records of meetings, medical reports, alternative options considered, and reasons for decisions.
Failing to fully involve the employee in an active and formal consultation process about matters relevant to a medical disengagement process is a common pitfall that can render an employer’s decision to terminate employment unjustified.
Practical Steps for Employers
Below is a high-level practical roadmap to manage medical incapacity issues and minimise risk:
Gather Relevant Medical Evidence
Obtain up-to-date, specific medical information about:
How the condition, or health issue affects the employee’s ability to perform duties.
Being clear on the impacts of the employee’s absence, or inability to perform their job on the employer’s business operations.
Understanding the employee’s medical prognosis and expected recovery timeframes.
Whether there are recommended accommodations or measures the employer can implement to help the employee return to work.
Seeking to understand an employee’s health prognosis through the provision of sound medical information, including recovery timeframes is a key step to any medical disengagement process requires.
An employer must make active efforts to obtain informed health information relating to an employee’s inability to work at full capacity due to health reasons, including reasonably accommodating an employee’s absence. These are all vital steps to ensuring a legally defensible process, or otherwise an employee may have grounds for successful personal grievance claims against an employer.
Genuine Consultation
Meet with the employee formally through a series of documented meetings, share concerns about their inability to perform the full requirements of their role, their continued absence and review medical information, and ask them to respond, including on any potential medical disengagement. Allow them to bring support or representation. Discuss:
Possible adjustments or accommodations that may be suitable.
Timelines for return and recovery.
Temporary, or permanent alternative duties – by agreement.
Potential outcomes, including termination of employment for medical incapacity
This engagement must be more than a formality and must be structured formally, including having a series of documented letters and steps to support the employer’s process. Procedural fairness considerations are of critical importance.
Consider Reasonable Accommodations
Explore if there are reasonable ways the employee could continue to work, such as:
Adjusted duties or duties with reduced physical demands.
Patterned or flexible hours.
Phased, or gradual returns to work.
Document and explain why certain accommodations may or may not be feasible – the employer should be able to demonstrate why accommodations cannot be made.
Decision Making
Only after thorough consultation via a formal medical incapacity process, genuine exploration of options, and receipt of medical input should dismissal be considered. If the decision to dismiss is made, provide:
Written notice and explanation, including reference to relevant medical information.
Opportunity for final response, including adherence to all the usual procedural fairness requirements.
The above is only a very high-level overview of the process and considerations that employer should have regard to. Refer to Employer Pro’s comprehensive Employer Toolkit on ‘Managing a Medical Incapacity and Disengagement Process’ for more detailed information, including our range of employer-focused templates, letters and documents for managing this process.
Case Law Snapshot – What Recent Decisions Tell Employers?
Honamombe v Tegel Foods Limited [2023] NZERA 721
MsHonamombe, a long-serving quality controller, suffered a shoulder injury and was placed on a return-to-work plan following surgery and medical treatment. Several steps were taken, but the employer terminated her employment on medical incapacity grounds in May2022. The Authority found the dismissal unjustified because Tegel did not follow a fair, reasonable process or provide MsHonamombe with a reasonable opportunity to recover.
The Authority found:
The employer did not adequately implement or adhere to its own rehabilitation and return‑to‑work plans.
There was insufficient inquiry into her medical prognosis after the initial return‑to‑work attempts failed.
That Tegel should have considered alternative, less physically demanding duties that were reasonably available to it before dismissing her.
MsHonamombe succeeded in her personal grievance for unjustified dismissal and was awarded approximately $30,000 in financial remedies (excluding the employer’s own legal costs) — underscoring that failing to properly follow a legally compliant medical incapacity process can have real financial consequences for employers.
Employer Takeaway: This case highlights the importance of sound process and decision-making when terminating employment due to medical incapacity. In this case, the employer’s own policies provided onerous obligations on the employer to actively consider and manage rehabilitation of injured employees, which the Authority determined it failed to do and dismissed the employee before imminent specialist medical information was received.
Risks and Remedies
If dismissal is unjustified, remedies may include:
Compensation for lost wages.
Compensation for injury to feelings and loss of dignity.
Reinstatement in limited case.
Legal costs.
Practical Example – Best Practice vs Risk
Best Practice:
An employee with chronic back issues provides updated medical evidence charting a very slow improvement, which could take upwards of three years, including further invasive surgeries and recovery timeframes. The employer:
Meets regularly to discuss duties.
Obtains a medical specialist’s prognosis, i.e. a written medical report to base decisions regarding employment on.
Reasonably accommodate an employee’s medical incapacity, or absence and allow them a fair opportunity to recover.
Implements a full, thorough and fair medical disengagement process in consultation with the employee, and
Only initiates termination after documented, genuine exploration of all reasonable accommodations. This process makes the substantive decision robust and defensible.
Risk Example:
An employee on long‑term sick leave is summarily dismissed without seeking medical input, exploring return‑to‑work options, or discussing alternatives. The employer rushes the process and terminates only after a month of absence. The termination meeting predetermines dismissal, likely making the process procedurally unfair and substantive reasons for termination unjustified.
Compliance Warning
Medical incapacity dismissals carry significant legal risk. Employers must ensure that both substantive and procedural fairness considerations are observed – failing either can render a dismissal unjustified. Key pitfalls include:
Making decisions without current, detailed medical evidence.
Failing to genuinely explore accommodations or alternative roles.
Predetermining dismissal before meaningful consultation.
Ignoring employee input or not documenting the process properly.
Non-compliance can lead to substantial financial remedies, including compensation for lost wages, injury to feelings compensation, and in rare cases reinstatement. Employers are strongly advised to follow a structured, formal and documented process, including seeking professional assistance before taking any termination action related to medical incapacity.
Procedural diligence is not optional – it is the safeguard that protects both your employees’ rights and your business from costly legal claims and protracted employment disputes.
This article is provided for general information only and does not replace professional advice. Employers should seek advice specific to their circumstances from Employer Pro if unsure about managing a medical incapacity process, including obtaining private health information from an employee, or managing termination of employment due to medical, or health issues. Employer Pro has a range of employer focused resources and services available through our competitive Employer Protection Packages.
Employer Pro Limited – Empowering Employers Through Effective People Solutions
