What is medical incapacity?
Medical Incapacity refers to an employee’s inability to be able to complete the duties and responsibilities aligned to the role they hold in a company after a prolonged period of absence due to sickness or injury.
There are many situations that arise where an employee may have been off work for a prolonged period of time, due to accident or illness, and the employer now begins to question whether they can continue to keep the employee’s role open for a longer period of time.
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Employers are not obligated to hold an employee’s position open for them for an indefinite period of time where the ongoing absence of the employee is causing an unreasonable detrimental impact on the company’s operations. Where the absence becomes prolonged, and is impacting on the company’s operations, the employer may consider terminating the employee’s employment following the implementation and completion of a fair and reasonable process.
However, ensuring the right process is implemented is important.
Frequently Asked Questions.
When can I terminate for medical incapacity?
A medical incapacity process that could lead to the termination of an employee’s employment would not generally commence until after the employee has been off work for a prolonged period.
Based on a recent Employment Relations Authority (ERA) case Sheridan v Pact Group [2025] NZERA 1, the benchmark process to follow must include the following core elements:
- Correctly determining the appropriate time to commence the medical incapacity process.
- Notifying the employee of the concerns held by the company and that it is now questioning whether the role can continue to be held open.
- Requesting the employee to provide information on the status of the injury or illness and the recovery prognosis.
- Communications and/or meetings with the employee and relevant health providers.
- Advising the employee of their rights to support and representation.
This process would generally occur over a period of weeks, rather than days, and must demonstrate that the employer gave full consideration to all information available to them at the time that decisions are made.
The process should also consider the alternatives to termination to coincide with the time that the employee is anticipated to be fully recovered.
What are the risks of terminating for medical incapacity?
Where the employer fails to follow a procedurally fair process leading to the termination of employment on the basis of medical incapacity, the employee has the right to raise personal grievances for both unjustified disadvantage and dismissal.
In both cases, the effect may include the requirement for the employer to make reparation to the employee, with this generally falling under three broad categories:
- Compensation for the perceived hurt and humiliation incurred by the employee as a result of the inferior process or termination decision.
- Reimbursement of lost wages from the date the employee was deemed fit to return to work until such time as they secured suitable alternative employment.
- A contribution to the employee’s costs of representation if they had engaged professional assistance.
However, an employee may also seek reinstatement to their former position if the matter was to proceed to the Employment Relations Authority.
What is the difference between a medical incapacity termination and a medical retirement?
Within a medical incapacity process, the employer will generally make the decision that they cannot hold the employee’s role open indefinitely. However, medical retirement is an alternative to dismissal for medical incapacity, where an employee accepts or acknowledges that, due to prolonged illness or injury, they are unable to perform their job duties and both the employer and employee amicably agree to end the employment relationship, allowing the employee to leave with dignity to potentially seek different employment aligned to their future capacity and capabilities.