Termination for Medical Incapacity

Photo by Kelly Sikkema on Unsplash

In an Employment Court decision, Sheridan v Pact Group, delivered on 18 March 2026, Chief Judge Christina Inglis overturned a finding of the Employment Relations Authority, which had previously ruled in Pact Group's favour, and ordered the company to pay $30,000 in compensation and lost wages to Roseanne Sheridan, a community support worker the company dismissed in July 2021. 

The employee, Sheridan, worked at a Pact Group community house in Oamaru, supporting residents with physical and intellectual disabilities. In January 2021, a resident threatened to slit Sheridan's throat during a dinner shift and subsequently Sheridan developed complex PTSD and lodged an Accident Compensation Corporation (ACC) claim for a mental injury at work. 

Rather than pursuing a rehabilitation process, as was set out in their Health and Safety Manual, Pact Group pressed Sheridan for medical information she did not hold, as the details remained pending from ACC's specialist assessment. Within two months of her going on sick leave, Pact warned that it might not be able to keep her position open.  Pact also allegedly claimed difficulty in providing cover for Sheridan's absence however did not provide any evidence to back that claim.

Generally speaking, termination for medical incapacity is an option that is open to the employer. However, in making any decision to terminate, the employer must follow reasonable steps and comply with their good faith obligations toward their employee.

While there were a bunch of factors in this case, the upshot was that Judge Inglis found the termination to be unjustified based on the following factors:

• Expert evidence showed the employees recovery time was going to be around 18-months, but the employer applied pressure on the employee within two months of the employee going on sick leave.

• Incapacity was suffered in the course of employment.

• The employer failed to follow their own policies and processes set out in their health and safety manual.

• No reasonable opportunity was offered to the employee to respond to the proposal to terminate employment before the employer confirmed their decision to terminate.

• The employer could have managed alleged “operational difficulties” in the employee’s absence but chose not to.

While confirming “it is well established that an employer is not bound to hold a job open indefinitely for an employee who is unable to return to work” (Lal v The Warehouse Ltd [2017]; Lyttelton Port Co Ltd v Arthurs [2018] and Dunn v Waitemata District Health Board [2014]) the Court set out a range of considerations that employers should take into account before terminating for medical incapacity. These included:

• The employee must be given reasonable opportunity and time to recover.

• The Terms of the employment agreement, any relevant policy, the nature of the position held, and the length of time the employee has been employed are likely to inform what is reasonable in the circumstances.

• The employer must carry out a fair and reasonable inquiry into prognosis for return to work, engaging appropriately with the employee and balancing fairness to the employee and the reasonable dictates of practical business requirements. This will likely involve seeking and considering relevant medical information; explaining reasons for the inquiry and the possible outcome·; seeking input from the employee; notification of the possibility of dismissal and providing the employee with an opportunity for input and comment.

Before making any decision, the employer must also fairly consider what the employee has to say before terminating employment.

Where the employer's actions caused an employee’s condition, the employer may have an ongoing responsibility to take reasonable steps to rehabilitate.

Lack of positive engagement from an absent employee may count against any later complaint the employee may raise as "a level of engagement with attempts to facilitate a return to work may reasonably be expected"." In this regard fairness cuts both ways, consistently with the mutual obligations which exist in the employment relationship.

If you are considering a medical incapacity the above advice given by the Court should be followed. McKone Consultancy can assist you meet your obligations in such situations.