When can an employer end employment for medical reasons?
Like redundancy, termination for medical incapacity is a no-fault dismissal; the employee hasn’t done anything wrong. It’s simply a difficult situation where health challenges make it hard or impossible for the employee to work. Because the process often involves sharing personal medical information, which an employee can understandably feel reluctant or vulnerable about, it’s important that things are handled with care. The approach should acknowledge the stress and uncertainty the employee may already be experiencing as they navigate their health. This article outlines what an employer should consider before deciding to end someone’s employment for medical incapacity.
The test of justification for any dismissal is whether the employer's actions, and how the employer acted, were what a fair and reasonable employer could have done in all the circumstances at the time of the dismissal. This means that the substantive reason for a dismissal (medical incapacity) and the process adopted must meet this test.
While every case and set of circumstances is different, and specific legal advice is advisable, the following are key principles relevant to a dismissal for medical incapacity:
The employee must be given a reasonable period of time, in the context of the specific circumstances, to recover and return to work.
The employer is required to undertake a fair and thorough inquiry before deciding to dismiss, including weighing up the fairness to the employee against the reasonable needs of the organisation. What is "reasonable" will be heavily influenced by the nature of the illness, the employee's length of service, and the nature of their role.
A full and fair inquiry should consider the employee’s medical position, their prognosis, and the expected timeframe for any return to work.
With the employee’s consent, relevant medical information should be sought from registered medical practitioners; for example, the employee’s GP, a specialist doctor, a psychologist or psychiatrist, and/or an Occupational Medicine Physician. There may be a clause in the employment agreement requiring the employee to attend an examination and provide the employer with the resultant report. The employer would usually cover the reasonable costs of the medical examination and medical report.
The employer should hold any personal information in accordance with the Privacy Act 2020.
A procedurally fair process includes notifying the employee that dismissal is a possible outcome, and any inquiry should be informed and give the employee a reasonable opportunity to provide input. This requires sensitive and open communication, making it clear that the information is needed to plan for the future and that the employee's job may be in jeopardy.
These cases often involve genuine health issues beyond the employee’s control and therefore require a sensitive and balanced approach; a balance between the interests of the employer and employee.
What is considered reasonable in the circumstances will depend on the terms of the employment agreement, any applicable workplace policies, and other relevant factors, such as the nature of the employee’s role, whether the employee’s absence can be covered, whether the employee has exhausted their leave entitlements, the severity and prognosis of the illness or injury, and the employee’s length of service etc.
If the employer’s actions contributed to the employee’s condition, the employer may have an ongoing obligation to take reasonable steps to rehabilitate the employee.
The employment relationship is a “two-way street”, and both parties have good faith obligations. An employee who fails to remain engaged or communicative during their absence may undermine a later challenge to the employer’s actions. That said, the reason for the employee’s absence may be relevant to what is considered reasonable consultation.
The employer should tell the employee of their right to seek legal advice on the matter. This would generally be at the employee’s own cost, although an employer may agree to contribute to the cost.
The employer should offer or remind the employee of any support available; for example, counselling through the employer’s Employee Assistance Programme.
An employer is not required to keep a job open indefinitely, even in cases of serious illness. There will come a point where an employer can “fairly cry halt” to the employment relationship i.e. there will be a point at which termination of employment for medical incapacity is justifiable.
Even in large organisations, there is no obligation to keep a role open indefinitely, although the scale and operational needs of the employer’s organisation are relevant.
A decision to "cry halt" must be substantively and procedurally fair, based on reliable medical information and a thorough, good-faith process.
Prior to dismissal an employer must consider alternatives to dismissal. These could include unpaid leave, flexible hours, accommodations/modifications, part-time work, temporary changes to duties, work from home, and/or alternative roles.
If you require legal advice, please get in touch.
The above information is drawn from the following cases including Hoskin v Coastal Fish Supplies Ltd [1985] ACJ 124, Lal v The Warehouse Ltd [2017] NZEmpC 66, and Lyttelton Port Co Ltd v Arthurs [2018] NZEmpC 9.
Disclaimer: The information contained in this article is current at December 2025, is general in nature, and is not a substitute for obtaining legal advice.