Incapacity-based dismissal deemed unlawful despite valid reason

The Federal Circuit and Family Court of Australia (FCFCA) has highlighted the ongoing risks for employers when managing incapacity-based terminations, even where medical evidence appears to justify the dismissal.

In the case of Palfreyman v Alfred Health, the FCFCA considered whether an otherwise lawful termination, based on the employee’s inability to perform the inherent requirements of her role, was rendered unlawful due to the operation of the general protections provisions in the Fair Work Act 2009 (Cth) (Fair Work Act).

Background

The employee, a Nurse Practitioner, had previously made a bullying complaint against colleagues and later ceased work due to a psychological injury.

Medical evidence ultimately supported the employer’s position that she could not safely perform the inherent requirements of her role, and she remained absent for an extended period of time. Notwithstanding this, the medical assessments also indicated that the employee would be able to return to work under the same conditions as before she took leave if she was provided with a safe environment, which allowed her to avoid interactions with her bullies. After efforts to facilitate a return-to-work program were stalled by her employer, the employer terminated her employment on incapacity grounds.

The employee subsequently filed a general protections claim, alleging that her dismissal was not soley due to incapacity, but was also influenced to her earlier complaint, thereby enlivening the general protections regime under the Fair Work Act.

Key findings

The FCFCA accepted that the employer had a legitimate and evidence-based reason to terminate the employee’s employment on incapacity grounds. However, that was not determinative of the claim.

Crucially, the FCFCA found that the employer had failed to discharge the reverse onus under the general protections provisions to prove that the dismissal was not motivated, even in part, by a prohibited reason – in this case, the employee had exercised a workplace right in raising a complaint in relation to bullying.

A central issue to the matter was the absence of direct evidence from the key decision-maker, the Director of Nursing, who had initiated the termination recommendation. The FCFCA characterised the Director of Nursing as having “skin in the game” due to their close involvement in the underlying events and return-to-work process. Without direct evidence from the Director of Nursing, explaining their reasoning for termination of the employee, the FCFCA was not satisfied that the dismissal was free from an unlawful motive.

The FCFCA also reinforced that “dual motive” is sufficient to establish a contravention. Even where a valid and operative reason exists (i.e. the employee’s incapacity to perform her previous role due to psychological injury and a breakdown of work relationships) the presence of an additional, prohibited reason may still render the dismissal unlawful.

While the FCFCA was not persuaded that the employee would have remained employed long term, it nevertheless awarded $22,000 in damages for non-economic loss and imposed an $8,000 penalty.

In addition, the FCFCA noted deficiencies in the employer’s systems, including absence of a specific policy addressing general protections or adverse action, and its failure to undertake any post-incident review.  These factors supported the need for specific deterrence in the imposition of penalties.

Key takeaways

This decision highlights that a valid reason for dismissal will not be enough in circumstances where a prohibited reason is also present.

Importantly, employers must be able to ensure that decision-makers can clearly justify their decisions with contemporaneous evidence, and that prior complaints or workplace rights play no role in the decision.

In addition, the case highlights the need for genuine and robust return-to-work efforts, particularly where incapacity arises from workplace issues, as well as the need for specific policies and training addressing general protections risks.

Finally, employers should treat adverse findings as an opportunity to review and strengthen internal processes, as a failure to do so may itself be considered in assessing penalties.

Learn more

If you are considering terminating an employee on the basis of incapacity and require further advice to ensure compliance, please contact NRA Legal on 1800 572 679 for a confidential conversation.

Palfreyman v Alfred Health (No 4) [2026] FedCFamC2G 280 (27 February 2026)