Terminating employment due to medical incapacity

Nick Stanley
by, Nick Stanley

People often get injured or suffer from illness. When an employee is no longer able to do their job because of serious illness or injury, an employer may have grounds to terminate their employment.

Raising and settling this issue can be fraught and distressing because you are dealing with a person’s health and livelihood. The process can be tough for the manager or business owner (especially if the person is a valued and trusted staff member) and can place stress on other employees.

There are also legal considerations. As with all employment matters, you need to make sure you are completely fair and reasonable and take your employee's input into account.

What is medical termination?

Termination for medical incapacity (also known as medical termination) is the option to end a person’s employment because they are unfit to work or incapacitated, and either:

  • they will never be able to return to work;
  • it is uncertain whether they will return to work or in what capacity; or
  • their absence will be too long for the business to reasonably support.

When you can consider medical termination

The key question when considering medical termination is whether the business can reasonably sustain the person’s absence from work.

The Ministry of Business, Innovation and Employment says that by law, an employer is not required to retain an employee who, due to illness or injury, is unable to do their work or fulfil their role. The question is how long the employer should keep the role open for the employee to return to.

As a guide, case law has shown that an absence of 12 weeks is generally considered long enough for a business to reasonably dismiss someone for medical incapacity.

We all know that three months is a long time, especially for small to medium-sized companies. You can specify a shorter time frame than 12 weeks (MyHR’s standard employment agreements stipulate 5 weeks), but this must be in the terms of your employment agreement.

The criteria for termination due to medical incapacity can also depend on what is detailed in any company policies, e.g. rehabilitation and return to work policy, the business’ size and circumstances, how long the person has been with the company, and how you’ve treated other injured or ill employees in the past.

It’s not normal sick leave or disciplinary

You cannot consider medical termination if someone is sick and can take sick leave, e.g. an employee gets a bad case of pneumonia and has accrued 20 days of sick leave over the course of their employment; they are entitled to take all that time to recover.

It’s also not about punishing the person for being absent or having a serious medical problem. The employee has not done anything wrong (the issue could well be outside their control), so you aren’t conducting a disciplinary investigation or rushing to fire them because they’ve been off work too much. The process is about looking to the future and assessing the likelihood of their return.

Risks you need to manage

As always, any employer or manager can do whatever they want when deciding to terminate a person’s employment, but you can’t avoid the risk of consequences under employment law.

If you handle this process badly, or don’t follow fair process, your employee may have grounds for raising a personal grievance for unjustified dismissal, unjustified disadvantage, breach of good faith, or breach of contract.

Penalties applied by the Employment Relations Authority and the Employment Court have been increasing in recent years, so you could lose substantial sums of money (in the tens of thousands) if you get this process wrong.

Your reputation as a good employer could also be affected if it is known you don’t treat your employees fairly.

Follow fair process

Like any employment procedure, the process of investigating and understanding your employee’s medical situation and ability to do the job must be handled fairly.

Fair process is as important as having good reason for considering ending the person’s employment, regardless of how obvious the situation appears to you.

Fair process must include:

  • Giving the employee a “reasonable” time to recover from the injury or illness.
  • Going through a fair enquiry into the employee’s situation, medical prognosis, and ongoing needs before you make a decision about whether to dismiss (you need to balance fairness to the employee with the needs of the business).
  • Notifying the employee of the possibility of dismissal.
  • Giving the person a fair chance to give you their feedback, suggestions, and thoughts on any proposition.
  • Taking into account the employee’s length of service and whether the job or business contributed to the injury/illness.
  • Investigating whether there are alternative duties or working arrangements open and available to them, e.g. staggering their return to work, working from home.

Making a decision

Be aware that the process could take a number of weeks and involve numerous meetings and exchanges.

When making a decision, consider all the information and options available. Is it possible to arrange cover and for how long? Are there other duties or hours the person could work?

Have you got enough medical information to assess their likely return to work? A simple letter or certificate from a GP may not be detailed enough. With the employee’s permission, you can contact their medical provider, surgeon, physio etc. to get a better understanding of their situation.

Lastly, ask yourself if the process has been fair and whether you have taken the employee’s suggestions into consideration.

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Potential outcomes

Depending on the situation, termination of employment may not be the only outcome. Other potential outcomes are:

  • Reduced hours of work.
  • Staggered return to work.
  • Alternative duties for a period of time.
  • Extended period of unpaid leave.

If you do decide to end employment due to medical incapacity, you are not required to pay out the person’s notice period if they are not currently at work (they are not available to attend the hours of work), but it is an act of goodwill and kindness to do so.

If you are thinking about dismissing someone for medical incapacity, please get in touch with us or seek other professional advice.



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