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Medical incapacity of an employee

Medical incapacity of an employee

Medical incapacity of an employee is a challenge that demands a delicate balance between empathy and practicality. Determining when to draw the line on a long-term illness and how long to keep a job open for a sick employee is a challenging task shaped by case law intricacies. Employers are not expected to hold a position indefinitely but they must follow a fair process before terminating an employee’s employment. This article explores the nuanced considerations and legal foundations, emphasising that there is no one-size-fits-all solution, and each scenario demands a tailored approach.

What is medical incapacity?

Medical incapacity occurs when an employee is unable to perform their role completely or perform their role to the required standard due to illness or injury.  An employee's ongoing absence can often justify dismissal. 

Legal framework 

Dismissal on medical grounds becomes tricky when considering what a reasonable time for recovery is, as the law is unclear on this matter.  No set amount of time is considered reasonable, ultimately each situation is fact-specific.

However, employers do not have to hold jobs open indefinitely for employees who are unable to carry out their duties to a sufficient standard.  When dealing with this situation, an employer needs to ensure it carries out a fair and reasonable process, and it must be substantively and procedurally correct. 

The case of Lyttleton Port Company Ltd v Arthurs is the guiding case for medical incapacity processes, and sets out the structure for dealing with medical incapacity:

  • The employer must give the employee a reasonable time (in the circumstances) to recover.
  • The employer is required to carry out a fair enquiry and then to make its decision about whether to dismiss the employee, balancing fairness to the employee and the reasonable dictates of its practical business requirements.
  • Fair and reasonable procedure will include notification of the possibility of dismissal and a fair enquiry enabling an informed decision, including seeking input from the employee.
  • The terms of the employment agreement and any relevant policy, the nature of the position held by the employee and the length of time the employee has been employed with the employer are factors that are likely to inform an assessment of what is reasonable in the particular circumstances.
  • Where the actions of the employer caused an employee’s condition, the employer may have an ongoing responsibility to take reasonable steps to rehabilitate the employee.
  • Even in a large organisation, an employer is not obliged to keep a job open indefinitely.
  • The relationship is a “two-way street".  A lack of positive engagement from an absent employee may count against any later complaint.

Key takeaways

An employer is not expected to hold a position open indefinitely for an employee, but employers must follow a fair process.  Case law has established that both parties have a duty of good faith to engage with the other in a constructive manner.

It is not a one-size-fits-all exercise and the tests and processes mentioned in this article must be tailored towards each scenario.

If you have any enquiries relating to this topic or article, please contact:

Melissa Johnston (Partner)

PH: 09 306 6729


© McVeagh Fleming 2023

This article is published for general information purposes only.  Legal content in this article is necessarily of a general nature and should not be relied upon as legal advice.  If you require specific legal advice in respect of any legal issue, you should always engage a lawyer to provide that advice.

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