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Dismissal for incapacity: A summary of the Law

April 2005

Note: The comments included in this publication should not be read as representative of the view of the Court, Authority, or the Department of Labour.  Rather, any view expressed is in the nature of an opinion only

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The general law concerning justification for dismissals due to an employee’s incapacity has been described by the Employment Court on a number of occasions as “well-established.”1  However, the Court has also commented that the exact nature of the legal requirements in this area varies with the facts and circumstances of each case and that “[n]o hard and fast rules can be laid down.”2  For that reason, this editorial will examine the general law in this area in conjunction with certain relevant cases in an attempt to provide both a helpful summary of the settled principles, and an illustration of the ways in which some of those principles have been applied in particular circumstances.      

I The general position, the test, and the balancing act

It has long been understood that an employer is not bound to hold an employee’s position open indefinitely if the employee is unable to carry out his or her duties due illness, injury, or other incapacity.3  A classic statement of the law is that “there can come a point at which an employer can fairly cry halt.”4  However, if an employer does decide to dismiss for incapacity, that can be challenged through the personal grievance procedure set out in the Employment Relations Act 2000 in the same way as any other dismissal.  Therefore, an employer must be able to justify such a dismissal both substantively and procedurally. 

The test commonly applied today in cases concerning whether a dismissal for incapacity was justified was set out by the Court of Appeal in Lang v Eagle Airways.5  The Court of Appeal agreed that “the test to be applied is whether the decision to dismiss was one to which a fair and reasonable employer could come as at the time when it became effective.”6  That test makes it clear that it is for the employer to make the decision about how long it can reasonably sustain an employee’s absence and at what point dismissal becomes necessary.  The Court will only interfere if the decision to dismiss was clearly not open to the employer on the information known to it, or that should reasonably have been known to it, at the time of dismissal.7  

The employer is required to carry out a fair inquiry 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.”8  The business interests component of that balancing act has been rephrased in one case as whether the employer was “reasonably entitled to a belief that as a result of [the employee’s] illness [the employee] could no longer be retained as an economic unit [in the employer’s business].”9  The Employment Court has commented that the balancing act between the employee’s interests and the employer’s business requirements is analogous to the considerations that may apply in the redundancy context.10 

II Substantive justification: Useful guidelines

The case of Marshall v Harland & Wolff,11 decided by the National Industrial Relations Court in England, set out a number of factors to consider when deciding whether an employment relationship had been dissolved by operation of the doctrine of frustration.  It is clear that termination of employment through the operation of that doctrine is quite a different situation from termination of employment at the employer’s initiative.  The latter situation requires justification while the former does not.12  However, the Employment Court has commented that the Marshall case “offers useful guidelines that may apply, by analogy, in situations where the doctrine of frustration has not been invoked, to test whether the employer can be said to have reached a point where, as a result of an employee’s absence, it can conclude the contract can be ended.”13  These guidelines are set out, and elaborated upon, below. 

A The terms of the contract

As with all personal grievances, an important factor to consider is the terms of the contract which governs the employment relationship.  Along with the general context provided by the contract of employment, an obvious but important consideration is whether the contract contains any terms which are directly applicable to the situation of the employee’s incapacity.  One example might be a clause which deems the employment terminated after a certain period of absence due to illness or injury.  In Nagels Creations v Walker14 the relevant collective employment agreement provided that if an employee became incapacitated and was unable, within a period of six weeks of such incapacity arising and continuing, to resume his or her normal employment duties, his or her employment would be terminated.  The Employment Court commented that, if the respondent’s employment had been governed by the collective agreement (which it was not), then (procedural fairness issues aside) her employment would have terminated through the application of the incapacity provision as soon as the employer had notified her that it was invoking that provision. 

It will also be necessary to consider any applicable sickness leave provisions.  Although a common sense approach might suggest an employee cannot be dismissed for incapacity prior to the expiry of his or her sick leave entitlements, there will undoubtedly be situations in which an employer will be justified in doing so.  The Court of Appeal indicated as such when it commented in Lang v Eagle Airways that, although the appellant’s conditions of employment entitled her to sick pay for generous periods, it did not follow that the employer was bound to continue to employ a pilot who consistently needed to use her sick leave to such an extent.15  In the recent case of Taylor v Air New Zealand the plaintiff’s contractual entitlement to “unlimited sick leave” did not preclude his dismissal for incapacity when it became clear that he would be unable to return to his duties within a reasonable time. 

B How long the employment was likely to last in the absence of sickness or injury

The second factor to consider is how long the employment was likely to last in the absence of sickness or injury.  Generally speaking, it will be easier to justify termination due to incapacity if the employment was inherently temporary in its nature or for the duration of a particular job, than if it was expected to be long term.  This factor weighed in the respondent’s favour in Shu-Bar Partnership v Mason16 where the Employment Court agreed with the Tribunal’s conclusion, as a matter of probability, that the respondent would have been a long-term employee had she not been dismissed.  The importance of this factor should not, however, be overstated.  In Innes-Smith v Wood,17 the respondent was dismissed for incapacity after less than two months absence.  The Employment Court did not consider it relevant to the question of justification for dismissal that the respondent had had significant disciplinary issues at work and that the future of her employment with the appellant had been tenuous even before her back injury. 

C The nature of the employment   

The third factor to be looked at is the nature of the employment and in particular the importance of the position the employee held to the employer’s business.  Where an employee is one of many in the same type of position it is likely to be harder for an employer to justify dismissal for incapacity than where the employee occupies a key position which must be filled and filled on a permanent basis in the event of a prolonged absence.  In terms of the “balancing act”, the absence of a key employee obviously has a greater effect on an employer’s business than the absence of an employee who occupies a less crucial position.  It may also be easier for an employer to arrange temporary cover for a less crucial position and that may influence the question of whether dismissal for incapacity was justified. 

In Hoskin v Coastal Fish Supplies the employee in question was the manager of a shop and had been incapacitated for lengthy periods.  The Arbitration Court considered that in that situation the employer was justified in dismissing the employee and appointing a permanent replacement.  The Court considered that it would have been unreasonable to expect the employer to obtain a temporary shop manager to cover for the employee’s absence but commented that “[h]ad [the employee] just been a counterhand (or similar) the position may well have been different.”18  

A similar consideration influenced the Employment Court in Wilson v Johnathons Catering.  In that case, the Court upheld the Tribunal’s decision that the termination for incapacity of the appellant’s employment as the supervisor of a catering contract was justified.  The Tribunal had accepted that it was not possible for the employer to do without a supervisor for the length of the appellant’s intended absence and it was not practicable to hire a temporary reliever for the appellant’s role or to cover her work in other ways.  The Court was not persuaded on appeal that those conclusions were wrong.

D The nature of the illness or injury, its duration and prognosis

Another factor to consider is the nature of the illness or injury which had rendered the employee unable to perform his or her employment duties, and in particular, how long the illness or injury has already continued and the prospects of recovery.  The greater the degree of incapacity and the longer the period over which it has persisted and is likely to persist, the more likely it will be to justify dismissal.  The Employment Court has consistently confirmed the importance of this consideration:  it stated in Innes-Smith v Wood that “[a] good reason [to dismiss for incapacity] usually consists of a combination of the length of absence to date of the employee and the prospects for the future as to a return to work.”19  On a practical note, in most circumstances it will be virtually impossible for an employer to fairly and reasonably undertake the balancing act required of it if it has not considered when the employee is likely to return to work. 

In Shu-Bar Partnership v Mason the respondent was willing and able to return to light duties by the ultimatum date set by the appellant for full fitness.  Medical evidence which would have been available to the appellant following a reasonable inquiry established that the respondent would have been able to return to full duties three weeks after that.  In those circumstances the Court found that the appellant’s decision that the length of absence would affect its business interests to such an extent that dismissal was justified was unfair and unreasonable. 

The employee in Parker v Lake View Farm Fresh Limited20 had been removed from his managerial position with the employer following a heart attack and a period of recovery.  The Employment Court granted him interim relief and commented that he had established his case for unjustified dismissal “to a much higher level than the low threshold [required].”21  The Court was clearly influenced by the speed with which the employee was removed from his position, just a fortnight after his heart attack and less than a fortnight after his early release from hospital (which in turn suggested the likelihood of an early recovery and return to work).    

E The period of past employment

The length of the employment prior to the incapacity is another relevant consideration.  It may be easier to justify dismissal where the relationship has a short history than where the relationship is of long standing.  The Court in the Marshall case commented that that was “good sense and,…no less good law,  even if it involve[d] some implied and scarcely detectable change in the contract of employment year by year as the duration of the relationship lengthen[ed].  The legal basis [was] that over a long period of service the parties must be assumed to have contemplated a longer period or periods of sickness than over a shorter period.”22 

The length of time that must pass before a relationship is considered “long standing” may vary according to the nature of the position.  In Shu-Bar Partnership v Mason the Court commented that “although for some, an employment period of almost four years was not one of long-term, for a manager/salesperson of a retail shoe shop it was probably longer than many, perhaps even most these days.”23 

F Any other relevant factors 

The factors listed above are not necessarily the only factors which must be taken into account in determining whether a dismissal for incapacity was substantively justified.  The fundamental question remains whether the employer’s decision to dismiss was fair and reasonable decision in all the circumstances, balancing the interests of its business with the interests of the employee.  Any other factors which bear on that question must also be considered. 

One example of another factor which may need to be considered in certain cases is whether it was reasonable for the employer to impose a date by which the employee was required to return to work or obtain medical clearance to do so. The answer to that question will depend on the circumstances of the case. In the recent case of Taylor v Air New Zealand such an ultimatum was found to be justified in all the circumstances of the case, but in Shu-Bar Partnership v Mason and Innes-Smith v Wood the arbitrary imposition of time limits, without adequate consultation, was not.

III Procedural fairness: Particular requirements and common errors

Even if there is substantive justification for a dismissal for incapacity, the dismissal may still be unjustified if the employer has failed to follow a fair procedure in carrying out the dismissal.  The presence of significant procedural defects may even cast doubt on the fairness and reasonableness of the employer’s conclusion as to the substantive justification for dismissal.  In many respects the procedural requirements for dismissal for incapacity are similar to the general requirements in relation to dismissals for other causes, such as misconduct or redundancy.  Those common requirements may include:  adequate notice of the possibility of dismissal; the opportunity to be represented; a fair and adequate inquiry including appropriate consultation; keeping the employee fully informed of the information held by the employer; and so on.  However, there are some material differences which will be examined as part of the discussion below concerning particular requirements, and common errors, of procedural fairness in the context of dismissal for incapacity. 

A Open and honest communication

i Notification of the possibility of dismissal

A reasonably common procedural error in cases of dismissal for incapacity is failure to notify the employee, or notify them far enough in advance, that the continuation of his or her incapacity may result in dismissal.  In Wilson v Shannon,24 Motor Machinists Ltd v Craig,25 and New Zealand Amalgamated Engineering and Related Trades IUOW v BHP New Zealand Steel Limited, the employees were given little or no warning of the possibility that their employment would be terminated due to their illness or injury.  In each of those cases the Employment Court considered that failure a serious procedural error which contributed to the decision that the dismissals were unjustified. 

The need for specific notification of the imminent possibility of dismissal is not removed by a previous acknowledgement from the employee that their job may be in jeopardy, or by an “out of date” notification by the employer that dismissal may occur.  In Methode Media v Collins, which was not a case of dismissal for incapacity but involved the analogous situation of an employee taking an unspecified period of leave for personal reasons, the employee was dismissed with no prior warning after four days absence.  It was accepted that before the employee’s departure he had said to the employer that she might need to replace him eventually if the length of his absence was going to cause major problems.  The Court found that, despite that agreement, the employer should have contacted the employee before making the decision to dismiss. 

The employer in Paykel v Morton26 notified the employee almost three months before his eventual dismissal that his absence due to a back injury was causing the company severe difficulties and that the situation could not continue indefinitely.  The Employment Court considered that the length of time and events which had occurred between the notification and the dismissal made it inequitable for the employer to rely on the notification as evidence that it had complied with its obligations of fair treatment. The employer should have reiterated at a later date its intention to consider dismissal.

ii Misleading impressions

A communication error perhaps more serious than the failure to notify an employee of the possibility of dismissal occurs when the employer misleads the employee in some positive way concerning their future with the employer, or the conduct of the decision making process.  The Employment Court has taken a serious view of such behaviour. 

The employer in Paykel v Morton failed to tell the employee that it was seeking a replacement for his position.  It later misled the employee into believing that his job was still open to be taken up after surgery, despite the fact that a permanent replacement had been appointed the previous day.  The Employment Court considered that fair process required the employer to honestly communicate with the employee its intentions and actions at all material times.  The Court held that “[the employer’s] failure to do so amounted…to quite fundamental breaches of the [employer’s] obligations of trust, confidence and fidelity towards a senior employee of long standing.”27

In New Zealand Amalgamated Engineering and Related Trades IUOW v BHP New Zealand Steel Limited the Employment Court considered that the employer had given the employee the clear impression that his employment would continue when its medical officer certified him unfit for work for a relatively short period and required a reassessment of his condition at the end of that period.  The Court found that it was unfair for the employer to have given that impression and, at almost the same time, to have dismissed him.

A similar sort of principle can be seen in Schenker & Co v Elliot28 where the employer gave the employee the clear impression at a meeting that it would not take any further steps in relation to her employment without first ascertaining the prognosis for her return from her surgeon.  The Employment Court found that, in those circumstances, dismissing the employee without first having received the surgeon’s opinion was unfair. 

B A fair inquiry

 An employer who wishes to dismiss for incapacity must carry out a fair inquiry before making the decision to dismiss.  That requirement of procedural fairness is shared with all other dismissals (no matter what the cause) requiring justification.  However, the focus of a fair inquiry in cases of dismissal for incapacity is unique.  The Employment Court emphasized that point in Innes-Smith v Wood:29

[What is] meant by consultation in this context is that the employer made inadequate attempts to inquire into and ascertain the facts before dismissing.  A dismissal for incapacity is not a dismissal for misconduct and it is therefore not a matter of putting suspicions or allegations to an employee and affording an opportunity for a response.  Nor is it an inquiry, as in a redundancy situation, into what the employee actually does and into whether there are other openings in the organisation the employee could fill.  In the case of incapacity, the inquiry is into the nature and likely duration of the incapacity…It is only when the employer is in possession of the full facts including the medical situation that a sensible decision can be made that is fair to both employer and employee.

i Adequate information

The above quote from Innes-Smith v Wood demonstrates that an employer must obtain enough information so that it can fairly make a decision which balances both the interests of its business and the interests of the employee.  As has already been mentioned, that will usually include reliable and up to date medical evidence and/or opinions concerning the nature of the injury or illness and the prognosis for recovery and likely return to work.  Although an employer may sometimes be able to safely act on the basis of information volunteered by the employee, the obligation to obtain information is generally considered a positive obligation:  the employer will need to actively seek relevant information, especially if the information already held is stale.30  Without adequate and up to date information on which to base its decision, the employer is unlikely to be able to justify a decision to dismiss. 

In Methode Media v Collins the Employment Court found that the dismissal of an employee who had taken leave of unspecified length for personal reasons was unjustifiable because the employer had made no attempt to ascertain the likely length of the employee’s absence before deciding to dismiss him. 

In Schenker & Co v Elliot the employee was dismissed for incapacity prior to a scheduled specialist’s appointment which the employer knew would provide a more accurate prognosis concerning the employee’s recovery and return to work.  The dismissal was found to have been unjustified.   

It is important to bear in mind when considering the requirement to make a decision based on adequate information that the test set out in Lang is whether the decision to dismiss was fair and reasonable “as at the time when it became effective.”  This may mean that, in certain situations, ongoing reassessment of the situation is required after the conclusion of the employer’s initial inquiry.  For example, if an employer gives an ultimatum date for a return to work, then the employer may need to actively seek, and reconsider the situation in the light of, any new information which arises prior to that ultimatum date.  The employer’s failure to do so in Shu-Bar Partnership v Mason, where new evidence indicated that the employee would be ready to return to light duties by the “conditional termination” date set by the employer and full duties three weeks after that, rendered the dismissal unjustified.  The Court commented that, applying the test set out in Lang v Eagle Airways, requirements of fair process and reasonable decision making remained until the employer notified the employee that the “conditional termination” was to take effect.31   

ii Input from the employee

A further, but interrelated, aspect of a fair inquiry is the obligation on the employer to obtain input from the employee during the decision making process.  The kind of input sought in an inquiry concerning incapacity, and the reason for seeking it, will be very different from the input sought in an inquiry in relation to possible dismissals for other causes, such as misconduct.  The Employment Court in Parker v Lake View Farm Fresh commented that the employer considering dismissal for incapacity needed input from the employee “not in the sense of giving him a hearing as would be required if he was accused of some indiscretion amounting to misconduct but, rather, in the sense of allowing the plaintiff an opportunity to throw light on his ability to return to the workplace and to perform his duties.”32  The fundamental reason for obtaining input from the employee in cases of incapacity is to allow them the opportunity to provide information (including, but not limited to, medical reports) which may avert a conclusion by the employer that dismissal is necessary.  The failure to provide an employee with that opportunity, or in many cases ongoing opportunities, will be a serious obstacle for an employer who wishes to justify a dismissal for incapacity.

Not only must an employer seek input from the employee, it must make it known at the time the information is sought that it may be used for the purposes of a decision to terminate the employment relationship.  The Employment Court in Barry v Wilson Parking noted that that requirement was “to ensure that the employee understands the seriousness of the issue and will have a motive for ensuring that the information is as full and accurate as he or she can make it to be.”  The Court commented that “[i]t would not be reasonable to expect so diligent a response to a mere casual inquiry after the employee’s health.”33

IV Conclusion

The parties in cases involving dismissal for incapacity may well be considered unfortunate, for the circumstances leading to the dismissal have often arisen through no fault of either the employer or the employee.  In that situation, the Employment Court requires the employer to make a fair decision, balancing its own business interests with the interests of the employee.  Procedural fairness in cases of dismissal for incapacity is as important as in any other case where a dismissal must be justified, but some significant differences exist particularly in the focus of the inquiry and the type of input that must be sought from the employee.  The Employment Court commented in Knight v Gates34 that the “cumulative effect [of the guidelines laid down by the Employment Court in relation to dismissal for incapacity] can be described in one phrase, the need for open and honest communication between both parties of their positions and intentions.” 


1Paykel v Morton [1994] 1 ERNZ 875, 883; New Zealand Amalgamated Engineering and Related Trades IUOW v BHP New Zealand Steel Ltd unreported, Colgan J, 14 October 1996, AEC 67/96, page 13. 

2 Barry v Wilson Parking [1998] 1 ERNZ 545, 549.

3 Canterbury Clerical Workers IUOW v Andrews and Beaven Limited [1983] ACJ 875, 877.

4 Hoskin v Coastal Fish Supplies Ltd [1985] ACJ 124, 127.

5 [1996] 1 ERNZ 574.

6 Lang v Eagle Airways [1996] 1 ERNZ 574, 582.  That test was taken from the general approach to justification for dismissal as set out by the Court of Appeal in Airline Stewards and Hostesses of NZ IUOW v Air New Zealand Ltd [1990] 3 NZILR 584 ; [1990] 3 NZLR 549.  Note that the test for justification for dismissal, previously found in case law only, has been set out in statute by s38 of the recent Employment Relations Amendment Act (No 2) 2004.  That section inserted s103A into the Employment Relations Act 2000 which reads:  “…the question of whether a dismissal or action was justifiable must be determined, on an objective basis, by considering whether the employer’s actions, and how the employer acted, were what a fair and reasonable employer would have done in all the circumstances at the time the dismissal or action occurred.”  There have not so far been any cases concerning whether this section will have any practical effect on the test for justification for dismissal for incapacity. 

7 New Zealand Amalgamated Engineering and Related Trades IUOW v BHP New Zealand Steel Ltd unreported, Colgan J, 14 October 1996, AEC 67/96, page 14.

8 Barry v Wilson Parking [1998] 1 ERNZ 545, 549.

9 Williams v Air New Zealand Ltd unreported, Finnigan J, 28 April 1997, AEC 32/97, page 29.

10 Wilson v Johnathons Catering Co Ltd unreported, Travis J, 13 November 2000, AC 44A/00, para 26.

11 [1972] 2 All ER 715.

12 See Taylor v Air New Zealand unreported, Colgan J, 28 October 2004, AC 61/04, paras 24-31 for a useful summary of the doctrine of frustration.  Although the doctrine of frustration has been raised in many of the cases mentioned in this editorial, the Employment Court, while recognising the validity of the doctrine, has so far declined to apply it.  

13 Wilson v Johnathons Catering Co Ltd unreported, Travis J, 13 November 2000, AC 44A/00, para 35; and see a similar comment in Methode Media Limited v Collins unreported, Travis J, 22 June 2001, AC 41/01, para 22.

14 Nagels Creations v Walker unreported, Palmer J, 24 December 1998, AC 99/98.

15 Lang v Eagle Airways [1996] 1 ERNZ 574, 582.

16 Unreported, Colgan J, 7 August 1996, AEC 44/96.

17 [1998] 3 ERNZ 1298.

18 Hoskin v Coastal Fish Supplies Ltd [1985] ACJ 124, 128.

19 Innes-Smith v Wood [1998] 3 ERNZ 1298, 1304.

20 Unreported, Goddard CJ, 6 May 1996, WEC 26/96.

21 Parker v Lake View Farm Fresh Limited unreported, Goddard CJ, 6 May 1996, WEC 26/96, page 14.

22 Marshall v Harland & Wollf [1972] 2 All ER 715, 719.

23 Shu-Bar Partnership v Mason unreported, Colgan J, 7 August 1996, AEC 44/96, page 28.

24 [1998] 3 ERNZ 68.

25 [1996] 2 ERNZ 585.

26 [1994] 1 ERNZ 875.

27 Paykel v Morton [1994] 1 ERNZ 875, 882.

28 Unreported, Colgan J, 13 July 1999, AC 53/99.

29 [1998] 3 ERNZ 1298, 1304.

30 Barry v Wilson Parking [1998] 1 ERNZ 545, 549. 

31 Shu-Bar Partnership v Mason unreported, Colgan J, 7 August 1996, AEC 44/96, page 25.

32 Parker v Lake View Farm Fresh Limited unreported, Goddard CJ, 6 May 1996, WEC 26/96, page 9.

33 Barry v Wilson Parking [1998] 1 ERNZ 545, 549. 

34 Knight v Gates unreported, Colgan J, 15 July 1997, AEC 1/97, page 11.