Terminating an Employee With Mental Health Issues in Australia

As an employer, you want to support your team and run a safe, productive workplace. Sometimes, though, you’ll face difficult situations where an employee’s mental health is seriously affecting performance, attendance or safety.

Can you lawfully end their employment? Yes-but only in limited circumstances, and only after you’ve taken reasonable steps to support the worker and followed a fair, compliant process.

This guide walks you through how to approach terminating an employee with mental health issues in Australia-practically, compassionately and within the law-so you can manage risk and do right by your people.

Can You Terminate An Employee With Mental Health Issues In Australia?

Having a mental health condition does not prevent someone from being dismissed. However, mental health is protected under anti-discrimination laws, so a termination can’t be because of the condition itself.

Dismissal may be lawful if:

• After reasonable support and adjustments, the employee is still unable to perform the inherent requirements of the role (capacity-based dismissal); or
• The employee engages in misconduct that justifies dismissal (noting mental health may be relevant to how you manage the process and outcome); or
• There’s a genuine redundancy (role no longer required and consultation obligations are met).

Before you get anywhere near termination, the law expects you to take reasonable steps to support the worker and follow a fair, transparent process. Failing to do so creates significant risks, including unfair dismissal and general protections (adverse action) claims.

For a deeper dive into the legal tests and process, it helps to understand your obligations when considering termination on medical grounds.

First Steps: Support, Adjustments And Procedural Fairness

When mental health is affecting work, your first move should be support-not discipline.

1) Identify Concerns Early And Talk

• Raise specific, factual concerns about performance, attendance or safety.
• Ask the employee how you can support them and whether there’s anything you should know.
• Offer access to your EAP (if you have one) and remind them of available leave options.

2) Explore Reasonable Adjustments

You have a duty under anti-discrimination law to consider reasonable adjustments that would enable the employee to perform the inherent requirements of the role. Examples include:

• Temporary change of duties, different tasks or reduced workload;
• Flexible hours, altered start/finish times or more breaks;
• Hybrid/remote work (if feasible) or different supervision arrangements;
• Time-limited performance plans with extra support.

Document what you considered, what was offered, and the outcomes. If an adjustment would cause unjustifiable hardship or pose WHS risks, record your reasoning.

3) Obtain Clear Medical Information

If capacity is unclear, you can ask for medical evidence that addresses what the employee can do and any restrictions-always respecting privacy and only requesting information that’s reasonably necessary to assess fitness for work.

In some cases, it will be appropriate to seek a fitness for work assessment (with the employee’s consent) or a note addressing when they may be able to resume duties. Knowing when you can request medical clearance helps you get the right information in a compliant way.

4) Follow A Fair Performance Process

If performance or conduct is an issue, follow a procedurally fair process:

• Give written notice of concerns and proposed next steps.
• Allow a support person at meetings.
• Provide reasonable time and support to respond or improve.
• Confirm outcomes and expectations in writing.

Having a structured performance management process helps you stay consistent and fair while preserving options if things don’t improve.

Assessing Capacity And The Inherent Requirements Of The Role

Capacity-based termination is only appropriate if the employee cannot perform the role’s inherent requirements, even with reasonable adjustments, within a reasonable timeframe.

What Are The “Inherent Requirements”?

These are the essential tasks, skills and conditions necessary to perform the job safely and effectively. Focus on outcomes, not how work has traditionally been done.

For example, if a customer-facing role has a genuine requirement for real-time client interaction, consider whether the employee can meet that requirement with adjustments (such as reduced hours or alternative contact channels) before concluding they cannot.

How Do You Assess Capacity?

• Review medical information (GP/psychiatrist/psychologist reports) about capabilities and restrictions.
• Consider the adjustments you tried and why they did or didn’t work.
• Assess WHS risks for the employee and others (including psychosocial hazards).
• Consult any applicable award or enterprise agreement on consultation or review processes.

If evidence shows the worker can perform the inherent requirements with adjustments, then dismissal on capacity grounds is unlikely to be lawful. If evidence shows they cannot now and won’t be able to in a reasonable timeframe, a capacity-based termination may be available-provided you’ve followed a fair and well-documented process.

Managing Misconduct, Performance Or Long Absence: Which Path Applies?

Mental health can intersect with different workplace issues. Matching your process to the issue reduces legal risk.

Performance (Capability) Issues

Where the issue is performance (e.g. missed deadlines, errors), focus on support and improvement plans first. Set clear expectations, reasonable timelines and check-ins. Consider adjustments and training. If performance doesn’t improve, a procedurally fair termination may be justified.

Misconduct

Serious misconduct (e.g. threats, harassment, serious WHS risk) must be investigated. Mental health context can be relevant to how you approach and consider outcomes, but it does not excuse unsafe behaviour.

Use a fair process: notify allegations, give an opportunity to respond, consider the response, and decide proportionately. A formal show cause letter is often appropriate before any final decision.

Long-Term Absence

If the employee is on extended leave, check any minimum protections under the Fair Work Act (e.g. protection against dismissal for temporary absence on sick leave within certain limits). Review medical information and your attempts to support a return to work. A capacity-based termination may only be considered once it’s clear the employee can’t resume the inherent requirements within a reasonable time, even with adjustments.

The Termination Process: Steps, Notice, Pay And Documentation

If you reach the point where termination is the necessary and lawful outcome, follow a careful, compassionate process.

1) Reconfirm The Evidence And Alternatives

• Ensure your decision isn’t because of the mental health condition itself, but because of capacity, performance or misconduct with a fair process.
• Double-check you considered and documented reasonable adjustments and WHS risks.
• Confirm you’ve met any consultation or procedural steps under an award or enterprise agreement.

2) Offer A Final Opportunity To Respond

Provide the material you’re relying on (where appropriate) and invite a final response. Consider anything new raised.

3) Decide And Communicate With Care

Deliver the decision compassionately and clearly. Confirm in writing, summarising the reasons (capacity/misconduct/performance), the process followed, and entitlements payable.

4) Pay Entitlements Correctly

• Accrued but unused annual leave (plus loading, if applicable);
• Long service leave (state/territory rules apply);
• Notice or payment in lieu of notice (unless serious misconduct justifies summary dismissal);
• Any outstanding wages and allowances.

Depending on the contract and circumstances, you might use garden leave during the notice period to protect clients, IP and team stability.

5) Consider A Mutually Agreed Exit

Sometimes, a mutually agreed separation with terms around release, references, handover and confidentiality is the most dignified outcome for everyone. If you go this route, ensure any separation agreement is carefully drafted and genuinely voluntary.

Common Legal Risks (And How To Avoid Them)

Employers face several legal risks when terminating an employee with mental health issues. Here’s how to manage the big ones.

1) Discrimination

Risk: Dismissing because of the mental health condition, or failing to consider reasonable adjustments.

Mitigation: Focus on inherent requirements, obtain appropriate medical information, genuinely consider adjustments, and document all steps.

2) General Protections (Adverse Action)

Risk: Taking adverse action (like dismissal) because an employee exercised a workplace right, took sick leave, or made a complaint.

Mitigation: Ensure your reasons are genuine, lawful and well-evidenced; keep a paper trail from the outset; separate protected activities from your decision-making.

3) Unfair Dismissal

Risk: Dismissal that’s harsh, unjust or unreasonable-often due to poor process or inadequate support.

Mitigation: Provide warnings (where appropriate), support and time to improve; consider adjustments; give a chance to respond; and ensure the decision is proportionate to the issues.

4) Privacy Breaches

Risk: Collecting or disclosing more health information than reasonably necessary, or mishandling sensitive records.

Mitigation: Only collect information needed to assess fitness or risk; store it securely; limit access; and communicate on a need-to-know basis.

5) Work Health And Safety (WHS)

Risk: Failing to manage psychosocial hazards and mental health risks at work.

Mitigation: Identify hazards (e.g. workload, role clarity, bullying), implement controls, train managers in supportive conversations, and review controls after incidents or complaints.

6) Procedural Missteps

Risk: Skipping consultation steps under an award/enterprise agreement, not allowing a support person, or failing to give adequate details of concerns.

Mitigation: Use checklists and templates, and consider engaging help early-especially for complex or sensitive cases.

Practical Tips For A Fair, Compassionate And Compliant Process

• Map the inherent requirements of the role and keep this list up-to-date.
• Train leaders to spot early signs of distress and to start supportive conversations.
• Use clear, written performance plans with timeframes and support measures.
• Escalate to medical evidence when needed-aligned with your approach to medical clearance and privacy.
• Keep thorough notes of all discussions, adjustments, review dates and outcomes.
• If you need to investigate misconduct, issue a proper show cause letter and allow a support person.
• Before deciding to terminate, seek a second internal check (or external advice) on risks, award obligations and documentation.

What To Put In Place Now (So Tough Decisions Are Easier Later)

The best way to reduce risk is to set clear expectations and processes before issues arise. Consider implementing or updating:

• Employment Contracts: Role duties, hours, performance standards, notice periods and lawful directions should be clear from day one. If you need tailored agreements, our Employment Contract service can help you get the foundations right.
• Workplace Policies: A mental health and wellbeing policy, performance and conduct policy, leave policy and complaint procedure help managers act consistently and lawfully. If you’re building or refreshing your policy suite, see our Workplace Policy support options.
• Performance Management Process: Having a clear, documented performance management process and templates avoids procedural mistakes and gives employees a fair chance to improve.
• Return-To-Work Pathways: A simple framework for assessing fitness for work, making adjustments, and re-inducting employees after time off reduces confusion and risk.

You might also want guidance for specific scenarios such as stress-related absences-our overview on managing employee stress leave steps through common issues employers face.

Key Takeaways

• You can lawfully terminate an employee with mental health issues in Australia, but not because of the condition itself-focus on capacity, misconduct or genuine redundancy with a fair process.
• Before considering dismissal, offer support, explore reasonable adjustments, and get appropriate medical information about fitness for work.
• Capacity-based termination turns on whether the employee can perform the inherent requirements of the role (with adjustments) within a reasonable timeframe-document this carefully.
• Follow procedural fairness: clear concerns, time to respond, support person, fair investigation where needed, and well-reasoned decisions with written records.
• Calculate and pay final entitlements correctly, including notice or payment in lieu of notice, and consider garden leave or a voluntary separation agreement where appropriate.
• Big risks include discrimination, general protections, unfair dismissal, privacy breaches and WHS failures-reduce them with strong contracts, policies and a consistent process.

If you’d like a consultation on handling termination where mental health is involved-including scripts, documents and risk checks-reach us on 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.