Dismissing an employee for medical incapacity: an employer's guide

An employee who cannot attend work, or who attends but cannot safely perform part of their role, presents a capacity question. It is not a disciplinary or performance question, and managing it as though it were — with warnings, performance plans or an escalating tone — reliably converts a difficult situation into a contested claim.

The most persistent misconception is that once an employee has been absent for more than three months the employer is free to end the employment. That confuses the expiry of one narrow statutory protection with the creation of a right. Nothing converts the passage of time into a valid reason for dismissal. Absence is a fact about attendance; incapacity is a conclusion about what a person can do, reached on evidence.

A defensible capacity decision rests on six things: current functional evidence and a prognosis; an accurate statement of the substantive requirements of the actual position; genuine consideration of adjustments and alternatives; compliance with leave, discrimination, workers compensation and return-to-work obligations; a fair process in which the employee knows the case and can respond before the decision is made; and contemporaneous proof of the decision-maker's reasons. An employer that cannot produce all six foundations is not ready to decide.

Australian Workplace Strategies is a workplace consultancy, not a law firm. This article is general information for employers, HR, WHS and senior management. It is not legal advice and is not a substitute for advice on a particular matter, which capacity dismissals almost always warrant.

Before any medical information is requested, the employer should be able to state what it is trying to work out. Capacity inquiries arise from four triggers, which do not lead to the same process: prolonged absence, where the question is whether and when a return is realistic; a partial return with restrictions, where the question is whether restricted duties are workable and for how long; a fitness concern in safety-critical work, where the issue is risk rather than duration; and the employee raising a condition and asking for a change to how the work is done, which is an adjustment conversation first.

Naming the trigger disciplines the inquiry and exposes cases that are not really about capacity. If the driver is dissatisfaction with performance, unresolved conduct allegations, a broken working relationship or a wish to end an uncomfortable dispute, a capacity framing will not survive scrutiny: the evidence will not support it and the employer will be defending a reason it did not act on. Where the position is no longer required to be performed by anyone, the matter is a restructure. Our guide to managing termination risk through fair and documented processes sets out how the pathways are separated at the outset.

Collapsing these three concepts into one is where most errors begin.

Entitlement comes first. Paid personal/carer's leave is a National Employment Standard under the Fair Work Act 2009 (Cth), with notice and evidence requirements attached; the evidence standard is what would satisfy a reasonable person that the absence is for a permitted reason, and no diagnosis is required. When accrued paid leave is exhausted, that particular paid entitlement ends for the occasion. It does not end the employment, is not a breach and is not a reason for dismissal. The continuing absence may be covered by another entitlement, by workers compensation arrangements, by an agreed period of unpaid leave, or may otherwise require the employer to determine and record its status. The Fair Work Ombudsman's guidance on long periods of sick leave is a useful cross-check, and routine certificate disputes are dealt with in our guide to personal leave disputes: notice, evidence and responses.

Temporary-absence protection is second. Section 352 prohibits dismissing an employee because they are temporarily absent from work because of illness or injury of a kind prescribed by the regulations. Regulation 3.01 of the Fair Work Regulations 2009 (Cth) prescribes that kind and bounds it by duration: broadly, an absence extending beyond three consecutive months, or beyond a total of three months in a twelve-month period, falls outside the prescribed kind — but an absence does not fall outside it while the employee remains on paid personal/carer's leave for the whole of the absence. The regulation also attaches evidence requirements. Read the current compilation rather than working from memory; the interaction between the consecutive period, the aggregate and the paid-leave carve-out is easy to state incorrectly.

Incapacity is third, and it is the only one of the three that can, on the right evidence and after the right process, support a dismissal. The end of the temporary-absence protection is not permission to dismiss; it means one specific prohibition may no longer be engaged. Everything else continues: the general protections, unfair dismissal where the employee is protected from it, Commonwealth, State and Territory discrimination law, award, agreement and contractual terms, workers compensation and return-to-work obligations, and any duty to make adjustments. A dismissal that section 352 does not prohibit can still be unfair, still be discriminatory and still be adverse action taken for a prohibited reason.

It must be current: a report accurate four months ago says nothing reliable about capacity today. It must be functional rather than diagnostic — what the employee can and cannot do, for how long and with what prospect of change, not the name of a condition. And it must be targeted to the real work, which means sending an accurate description of the duties actually performed rather than a position description last reviewed years ago.

Well-framed questions cover: which listed duties the employee can and cannot currently perform; what restrictions apply, whether they are absolute or qualified, and whether they are temporary or enduring; what changes, supports or graduated arrangements would assist and over what period; whether there is a foreseeable prospect of return to the substantive requirements; and when the position should be reviewed. Asking a practitioner to characterise the employment relationship, comment on workplace disputes or opine on dismissal is inappropriate.

An employer need not treat every certificate as the final word, but nor can it disregard evidence it finds inconvenient. For leave substantiation the statutory standard governs. For capacity, where a certificate is brief, inconsistent, silent on function or not directed to the actual duties, seek clarification or a more targeted report on a proper basis rather than substituting a manager's own assessment.

Whether an employer can direct an employee to attend an independent medical examination has no single national answer. The source of the direction must be established rather than assumed: an express contractual term, an enterprise agreement or other instrument, a policy forming part of the contract, or a statutory context such as a safety-critical licensing regime or an injury-management scheme. Even then the direction must be lawful and reasonable in the circumstances, which turns on purpose, scope, the information sought, choice of examiner, cost, notice and how the report will be handled. Where the employee objects or the basis is contested, obtain advice before issuing the direction.

The table separates five points at which an employer commonly seeks health-related information about the same employee. They answer different questions, justify different information and carry different risks. Treating one as though it answered another is a frequent cause of failure.

A capacity assessment is meaningless without an accurate account of what the position requires, and this step is skipped constantly: position descriptions drift, roles absorb responsibilities never written down, and the tasks a manager considers essential are frequently not the ones on the document.

The exercise is to identify the substantive requirements of the role as it genuinely operates — what the position exists to achieve, and which functions are central rather than peripheral. Describe them functionally (sustained attendance at a site, rostered availability outside ordinary hours, physical tasks of a specified kind, sustained concentration, supervision of a dispersed team) and record the evidence for each: rosters, organisational charts, escalation logs, delegations and the actual pattern of work over a representative period.

Seniority changes the analysis rather than removing it. A role carrying continuity-of-leadership, decision-availability and direct-management requirements is genuinely difficult to discharge from extended absence or through informal coverage — but those requirements still have to be identified, described and evidenced. They do not follow from the job title.

Two legal concepts must be kept distinct. In discrimination law, "inherent requirements" forms part of the framework by which conduct that would otherwise be unlawful may be permitted, applied against statutory tests that include the availability of reasonable adjustments and unjustifiable hardship. Under the Fair Work Act, an unfair dismissal analysis asks whether there was a valid reason related to the person's capacity, alongside the other criteria the Commission must take into account. The factual inquiry overlaps, but the tests sit in different statutes and a conclusion under one does not decide the other.

Capacity is assessed as it stands, on the evidence, with a realistic view of what that evidence says about the future — not by reference to how long the employer has been inconvenienced. The evidence needs to answer three things: what the employee can do now; what, if anything, is likely to change; and over what period.

A report stating that an employee is currently unfit and should be reviewed in six weeks does not support a conclusion that there is no prospect of return. A report identifying enduring restrictions incompatible with central requirements, with no prospect of change, is a different matter. Most cases sit between those poles and call for a review horizon set deliberately, communicated to the employee and then observed.

Resist internal rules of thumb — a fixed number of weeks after which a decision is automatically made. No such period is prescribed, and applying one mechanically invites the finding that the calendar drove the decision rather than the evidence. Where a prognosis is uncertain, record it as uncertain: overstating medical evidence in an internal paper or a show-cause letter is serious, because the document will be produced and the gap will be apparent.

Three distinct obligations are commonly merged into one line in a decision paper, to the employer's disadvantage.

Reasonable adjustments are a discrimination-law concept. Under the Disability Discrimination Act 1992 (Cth) and equivalent State and Territory laws, a failure to make reasonable adjustments can itself constitute discrimination, subject to statutory limits including unjustifiable hardship, which is assessed against legislated factors on evidence rather than impression. The analysis begins with what the person can do and what change would enable performance of the inherent requirements; it is not answered by asserting that the role has always been performed a particular way. The Australian Human Rights Commission's guidance on disability and employment is a useful orientation, though the applicable statute governs.

Suitable employment and pre-injury employment are workers compensation concepts. They arise under an injury-management scheme, are driven by certificates of capacity and a return-to-work plan, and are supervised by an insurer or agent. Providing suitable duties is not the same exercise as making a reasonable adjustment, and doing one does not discharge the other. Nor does the absence of a compensable claim remove an adjustment duty arising under discrimination law.

Redeployment, in the Fair Work sense, is most developed in the redundancy context. In a capacity matter, consideration of alternative roles is not that statutory test; it is part of procedural fairness and of the adjustment analysis. The discipline is the same: identify reasonably available positions, assess them against the employee's capacity and skills, involve the employee, and record why each was or was not viable.

An employer is generally not required to create a position that does not exist, or to strip the central requirements from a role so that what remains is a different job. But that is a starting point, not a rule that disposes of the analysis: the applicable statute, the organisation's size and resources, comparable roles and the hardship evidence all bear on it. Refusing a proposal because "we don't create roles", with no analysis, is difficult to defend later.

Workers compensation and return-to-work obligations are State and Territory matters and they differ — in the duties imposed, their duration, how they interact with dismissal and the consequences of non-compliance. Employers operating across borders should map the obligations applying to the particular worker rather than applying one internal standard.

Victoria illustrates the point rather than defining it. The Workplace Injury Rehabilitation and Compensation Act 2013 (Vic) imposes return-to-work obligations including planning the return to work, consulting, and providing pre-injury or suitable employment to a worker with a capacity for work. WorkSafe Victoria describes that obligation as operating over an employment obligation period ordinarily of 52 weeks, and its guidance on employer legal obligations during return to work and on how long employment should be provided after an injury explains how it is applied. The period is subject to the Act and to exclusions, and where a claim has been rejected and the rejection disputed the position should be confirmed for the specific matter rather than presumed either way.

Two practical points follow. A rejected claim is not a finding that the worker has no incapacity; it is a decision about compensability, and it may be under challenge. And scheme obligations run in parallel with employment obligations: complying with a return-to-work plan does not answer the unfair dismissal, discrimination or general protections questions, while terminating without regard to a live scheme obligation can create exposure under the scheme as well.

Where a psychological injury is involved, recovery planning, suitable duties and return-to-work coordination are developed in our guide to managing psychological injury, rehabilitation and return to work.

A medical condition will frequently be a disability for the purposes of Commonwealth, State or Territory discrimination law, and those definitions are broad: they can capture temporary conditions, conditions in remission, conditions that may develop in the future, and symptoms that are a manifestation of the condition. Assuming the framework is not engaged because a condition seems minor or short-term is a serious risk.

Both direct and indirect discrimination need to be considered. Direct discrimination concerns less favourable treatment because of the attribute. Indirect discrimination concerns an apparently neutral requirement that disadvantages people with the attribute and is not reasonable — a full-capacity return policy, a blanket attendance requirement or an inflexible roster rule can each raise it. Failure to make a reasonable adjustment is a separate limb again.

Section 351 of the Fair Work Act prohibits adverse action because of listed attributes including physical or mental disability, with its own qualifications and exceptions, and its relationship with State and Territory law turns on the facts. The practical consequence is that one decision can be examined simultaneously under unfair dismissal, the general protections and discrimination law, each with different tests, time limits and remedies.

Part 3-1 of the Fair Work Act is where capacity decisions most often come unstuck, because it asks a question employers are rarely prepared for: why, in fact, did the person who made this decision make it?

Section 340 prohibits adverse action because an employee has, exercises or proposes to exercise a workplace right, or to prevent its exercise. Section 341 defines a workplace right broadly, including an entitlement to the benefit of, or a role or responsibility under, a workplace law or instrument, and the ability to make a complaint or inquiry in relation to employment. On particular facts, taking personal leave, making a workers compensation claim, raising a bullying complaint or contesting a decision may each be capable of being characterised as the exercise of a workplace right. Section 342 defines adverse action, including dismissing an employee, injuring them in their employment and altering their position to their prejudice, and section 342(2) extends the concept to threatening such action.

Two proof provisions shape the litigation. Section 360 provides that a person takes action for a particular reason if the reasons include that reason, so a prohibited reason need not be the only or main reason. Section 361 reverses the usual position on proof: the alleged reason is presumed unless the person proves otherwise.

The employer must therefore establish the actual reasons of the person who decided, ordinarily through that person's evidence tested against the contemporaneous record. A file showing a decision taken on documented capacity grounds, with the reasoning recorded as it was formed, gives that evidence something to work with; reasoning that first appears after a complaint does not. Post-claim procedure is dealt with in our guide to responding to a general protections dismissal application.

Totino v Metro Trains Melbourne Pty Ltd [2026] FCAFC 120 was decided by the Full Court of the Federal Court (McEvoy, Dowling and Hill JJ) on 8 September 2026. It illustrates how a capacity dismissal is examined under Part 3-1, and how narrow an appellate outcome can be. The judgment is available through the Federal Court judgments collection and should be read in full before it is relied on.

Ms Totino held the senior position of Central Group Manager, with approximately eight Depot Train Driver Managers reporting to her and around 500 train drivers beneath that structure. After bullying complaints in February 2022 she was stood down while Metro investigated. She made a workers compensation claim supported by material referring to severe psychological injury; it was rejected and the rejection challenged. On 11 July 2022 Metro wrote proposing termination on the grounds of medical incapacity and the operational need to fill the role permanently, invited a response and reserved the decision. Employment ended on 18 July 2022.

The Full Court upheld the finding that the operative reasons of the relevant decision-makers were medical incapacity and operational need, not Ms Totino's exercise of workplace rights. That turned on evidence about what those decision-makers in fact considered and why — the ordinary way a section 361 case is resolved.

On advisers, the decision should not be read as saying an adviser's state of mind is irrelevant. Where an adviser significantly contributes to the adverse action or to the reasons for it, that state of mind may matter to the causal inquiry. What was accepted here was that the workplace-relations adviser's work was advice about whether a course was open, while the responsible executives independently formed the operative reasons. The lesson is about structure and evidence, not immunity: if an adviser effectively decides, the adviser's reasons are in issue.

On section 342(2), the Full Court held that "threatened" adverse action requires an intimidatory purpose. The 11 July 2022 letter did not have that character: it communicated a proposed course, gave reasons, invited a response and reserved the decision. It does not follow that every document headed "show cause" is protected. A letter announcing a decision already made, giving no real opportunity to respond, or evidently intended to pressure an employee into resigning, may be characterised very differently.

On the Victorian legislation, the Full Court held that section 588 of the Workplace Injury Rehabilitation and Compensation Act 2013 (Vic) did not create an implied private cause of action in damages. That is the extent of the holding. The Court did not decide that Metro's use of the report was lawful, did not finally determine whether the report had been obtained under or pursuant to the Act, and noted that relevant provisions — including sections 289(1) and 291 — did not appear to have been put to the primary judge. The handling of scheme material remains a live question.

What the decision does not do: it did not decide whether the dismissal was unfair, did not decide any disability discrimination question, and did not determine compliance with the contract, with section 352 or with Victorian return-to-work obligations. The appeal resolved the issues argued on it. Reading it as authority that incapacity plus operational need justifies dismissal draws a conclusion the case does not support.

Capacity decisions in larger organisations are rarely made by one person in one moment: a line manager raises the issue, an HR business partner gathers material, a physician reports, a workplace-relations adviser advises on options, an executive approves and someone else signs the letter. Each contribution has a different legal significance, and the employer must be able to explain the sequence.

Map every material contributor before the decision, not after a claim: who identified the issue, who obtained the medical evidence, who analysed adjustments and alternative roles, who advised and on what, who formed the reasons and decided, and who approved.

The person who decides must genuinely consider the material and form their own reasons, and the record should show it. Where a decision-maker simply adopts reasons drafted for them, the adviser/decision-maker distinction becomes difficult to maintain and the causal inquiry extends to whoever did the thinking. Advice about whether a course is open is legitimate; substitution of the adviser's judgement is not.

Operational need is a legitimate consideration. A senior leadership position cannot always be held open indefinitely, and coverage arrangements have costs and risks for the people carrying them. Employers are entitled to take that into account and to say so.

Its limits are easily overlooked. It is not evidence of incapacity and cannot supply the medical foundation, and it is not a licence to shorten the process — a strong operational driver makes an unhurried, documented process more important, because the risk of the decision looking pre-ordained is higher. It must also be evidenced rather than asserted: what the coverage arrangement is, how long it has run, what it costs, what risks it creates and why the alternatives are not sustainable.

There is also a boundary: if the role is no longer required to be performed by anyone, the matter is a restructure with its own consultation, selection and redeployment obligations. Using a capacity framing to avoid a consultation obligation does not work.

A show-cause step is worth nothing unless the decision is genuinely open when it is sent; the employer should be able to say what it would have done differently had the response been different.

A sound letter identifies the position and its substantive requirements; sets out and provides the medical material relied on; states the proposed course and reasons, including operational considerations; explains the adjustments and alternative roles considered and the outcome; invites a response, including on anything the employer may have missed; allows a reasonable period, with flexibility where health affects the employee's ability to respond; offers a support person and, where relevant, accessible formats or an interpreter; and states expressly that no final decision has been made.

What follows matters as much. The response must actually be considered and the consideration recorded, including reasons where it changes nothing. If it raises new medical material, a new proposal or an unassessed adjustment, the process pauses for that assessment. The decision, its reasons and its date are then recorded contemporaneously by the person who made it.

Health information is sensitive information and attracts stricter handling. The employee-records exemption in the Commonwealth privacy framework is narrower than many employers assume — it is directed to acts and practices directly related to a current or former employment relationship and to an employee record held by the organisation, and it is not a general licence for excessive collection, insecure storage or free internal circulation. State and Territory health-records and privacy legislation, surveillance laws and duties of confidence may also apply.

Scheme material deserves particular care: it is obtained for injury-management purposes under the scheme's rules, and using it for an unrelated employment decision raises questions not answered by mere possession — questions the Metro Trains appeal expressly did not resolve. Take advice on the basis for doing so in the relevant jurisdiction.

The same mistakes recur, and almost all are avoidable at low cost.

• Treating an elapsed period of absence, rather than evidence about capacity, as the reason for the decision.
• Reading the end of the temporary-absence protection in section 352 and regulation 3.01 as permission to dismiss.
• Treating the exhaustion of accrued paid personal leave as an event that ends employment or justifies ending it.
• Requesting a diagnosis when the question is function, or sending a practitioner a position description that no longer reflects the role.
• Relying on medical evidence that is months out of date at the point of decision.
• Directing an independent medical examination without establishing the source of the direction or its reasonableness.
• Merging reasonable adjustments, scheme suitable duties and redeployment into a single unevidenced sentence.
• Dismissing an adjustment proposal because the role has always been performed a particular way, without any hardship analysis.
• Treating the rejection of a workers compensation claim as evidence that the employee is fit for work.
• Running a capacity process while managers document the matter as a performance or conduct problem.
• Sending a show-cause letter after the role has been permanently backfilled or the decision internally approved.
• Allowing an adviser to form and draft the reasons that the nominal decision-maker then signs without genuine consideration.
• Failing to record the decision-maker's reasons at the time, and constructing them after a claim is filed.
• Circulating clinical detail internally, or repurposing scheme material without considering the basis for its use.

The stages are a sequence, not parallel tasks, and each produces a record. One, framing. Two, duty analysis. Three, information: current, targeted, consented functional evidence on a properly established basis. Four, analysis of capacity, prognosis and review horizon against the duty statement. Five, options: adjustments, scheme obligations, graduated return and alternative roles, in consultation with the employee. Six, screening for protected reasons. Seven, the show-cause step, with a genuinely open decision. Eight, consideration of the response and, where necessary, a return to earlier stages. Nine, the decision, by an identified person who records their own reasons at the time. Ten, implementation — notice, final pay, entitlements and documentation under the applicable instruments, with the Fair Work Ombudsman's dismissal guidance as a cross-check. To test readiness systematically, our Termination Process Readiness Check works through the reason, evidence, fairness and implementation questions in order.

Medical-capacity dismissals sit at the intersection of more legal frameworks than almost any other employment decision — the National Employment Standards, the general protections, unfair dismissal, discrimination law in three tiers, WHS duties, jurisdiction-specific compensation schemes, privacy obligations and the contract itself — and each can defeat a decision that looks sensible operationally.

Obtain advice before the decision is framed where any protected reason may be in play; where a claim is live, rejected and disputed, or scheme material is to be relied on; where an examination direction, the medical evidence or a proposed adjustment is contested; or wherever review of the six foundations identifies a gap.

AWS supports the advisory rather than legal parts of this work: framing the inquiry, building an accurate duty statement, designing the information request and consultation, structuring adjustment and alternative-role analysis, separating adviser and decision-maker roles, and building the contemporaneous record. That work is delivered through workplace advisory and compliance and psychosocial safety and WHS engagements, alongside an employer's legal advisers rather than in place of them.

Statutory material: Fair Work Act 2009 (Cth), in particular ss 340, 341, 342, 351, 352, 360, 361 and 387, and the National Employment Standards provisions on personal/carer's leave; Fair Work Regulations 2009 (Cth), in particular reg 3.01; Disability Discrimination Act 1992 (Cth) and State and Territory equal opportunity and anti-discrimination legislation; Workplace Injury Rehabilitation and Compensation Act 2013 (Vic), used as a jurisdictional illustration only.

Case material: Totino v Metro Trains Melbourne Pty Ltd [2026] FCAFC 120 (McEvoy, Dowling and Hill JJ, 8 September 2026), Federal Court of Australia.

Regulator and agency guidance: Fair Work Ombudsman, long periods of sick leave and dismissal; WorkSafe Victoria, employer's legal obligations during return to work and how long a worker should be given employment after injury; Australian Human Rights Commission, disability and employment guidance.

Legislation and guidance change. Provisions should be read in the current in-force compilation and guidance checked at its source before it is relied on in a particular matter.