What to Do When An Employee’s Sick Leave Runs Out

As a small business owner, it can be stressful when an employee is genuinely unwell, has used all their sick leave, and still can’t return to work.

On one hand, you want to do the right thing by your team. On the other, you still need to run your business, cover shifts, meet customer demand, and manage costs.

The good news is that New Zealand employment law gives you a framework to work through this situation fairly and legally. The key is to slow down, follow a process, and document your steps - because when an employee has no paid sick leave remaining, it’s rarely a “quick fix” problem.

What Does “Sick Leave Runs Out” Mean Under NZ Law?

In New Zealand, sick leave is mainly governed by the Holidays Act 2003. In simple terms, once your employee has used their entitled sick leave, they may still be unwell - but you are no longer required to keep paying them as “sick leave” (unless their employment agreement provides extra benefits).

Quick Refresher: Minimum Sick Leave Entitlements

Employees generally become entitled to sick leave after 6 months’ continuous employment.
The minimum entitlement is 10 days per year.
Unused sick leave can be carried over, but the total entitlement you’re required to provide can be subject to a maximum (often resulting in a maximum available balance of around 20 days at a time under the minimum rules, depending on what’s been used and what the employment agreement says).

When someone has taken all available sick leave (and any sick leave you’ve already advanced them), that’s when you’re in the “sick leave runs out” zone - and you need a plan that balances legal compliance and operational reality.

Also Check: The Employment Agreement

Before you do anything, check the employee’s Employment Contract and any policies (like a leave policy). Some businesses provide more than the minimum, or have specific rules about:

medical certificates and evidence requirements;
how leave is requested and approved;
when and how leave can be advanced; and
processes for extended absence.

If your documents are unclear, it’s worth getting advice early - uncertainty is where disputes often start.

A Practical Step-By-Step Process When Sick Leave Runs Out

When your employee has no sick leave left, you’ll usually get the best outcomes by following a clear, good-faith process. The Employment Relations Act 2000 requires parties to act in good faith - and that matters a lot in medical and absence-related situations.

1) Confirm the Facts (Leave Balances, Dates, Evidence)

Make sure you have an accurate record of:

how much sick leave has been taken (including any sick leave advanced);
what other leave entitlements exist (annual leave, alternative holidays, etc.);
the time period of the absence; and
any medical certificates provided so far (and their dates).

It sounds basic, but leave disputes often come down to mismatched assumptions about balances and dates.

2) Talk To the Employee Early (Don’t Wait for a “Breaking Point”)

Once it looks like the employee’s sick leave is close to running out (or has run out), set up a conversation. Keep it supportive and practical. You might cover:

how they’re doing and what support they need;
whether they expect to return soon (and if so, when);
whether they can do partial hours or modified duties;
what leave options might apply next; and
what information you need to plan the business (without pressuring them to disclose private details).

If the absence relates to mental wellbeing, it can help to approach it with extra care and consistency, including understanding how a Mental Health Day can fit into broader leave and wellbeing conversations.

3) Ask for Updated Medical Information (When Appropriate)

If the employee can’t confirm a return-to-work timeframe, it’s usually reasonable to request updated medical evidence. The goal isn’t to interrogate the diagnosis - it’s to understand capacity:

Are they currently fit to work?
If not, when might they be fit?
Are there restrictions (e.g. no lifting, reduced hours, no customer-facing work)?
Would a graduated return help?

In some cases, you may need more detail than a standard medical certificate provides. If you’re considering longer-term decisions (like restructuring duties or termination for incapacity), it’s especially important to handle this step carefully and lawfully.

Also note that, under the Holidays Act rules, you can generally ask for a medical certificate after an employee has been sick or injured for 3 consecutive calendar days. If you ask for proof earlier than that, you may need to pay the employee’s reasonable costs of getting the certificate (unless the employment agreement says otherwise).

4) Consider Short-Term Coverage and Operational Needs

While you’re working through the process, you still need to keep the business running. Depending on your situation, you might:

bring in short-term cover;
reallocate duties temporarily; or
adjust rosters and hours for the wider team.

If you’re thinking about changing hours more broadly, tread carefully - changes to working time can create legal risk if not consulted on properly. If relevant, take a look at Reducing Staff Hours and get advice on the right process for your situation.

Leave Options After Sick Leave Runs Out (And What You Can’t Do)

When sick leave runs out, employers often ask: “What leave can they take now?” There are a few possibilities - but it’s important not to make assumptions or force an option that isn’t legally available.

Option 1: Annual Leave (If the Employee Agrees, or If You Follow the Rules)

Sometimes the most practical solution is for the employee to use annual leave while they recover. This can be helpful where:

the employee wants to stay paid while off work; and
the absence is still expected to be relatively short-term.

However, you can’t always simply “move” someone onto annual leave because it suits the business. The rules about directing annual leave can be technical, so it’s worth understanding Annual Leave direction requirements before you attempt it.

Option 2: Unpaid Leave (Common, But Should Be Agreed and Documented)

Once sick leave has run out, unpaid leave is often the next step - especially where the employee is still unfit for work and has little or no annual leave available.

While unpaid leave can be agreed, don’t treat it as a “set and forget” solution. It’s best practice to:

confirm the unpaid leave in writing (dates, review points, expectations);
set a time to review the situation (for example, in 2 weeks or 4 weeks); and
make it clear what information you’ll need to plan ahead (like updated medical info).

Option 3: Advancing Sick Leave (Discretionary, Not Automatic)

Some employers choose to advance sick leave even when it’s not required. This can be a supportive approach - but it’s usually discretionary, and you should:

be consistent across employees (to avoid perceived unfairness);
confirm whether it’s an advance against future entitlements; and
record the agreement clearly.

If you’re unsure whether an advance is “safe” in your circumstances, it’s worth getting advice first - particularly if the employment relationship is strained or the absence is likely to be lengthy.

Option 4: A Graduated Return or Alternative Duties

If the employee can do some work but not their full role, you may be able to agree on temporary adjustments such as:

reduced hours for a short period;
different tasks (lighter duties, back-office work, non-customer-facing duties);
working from home (where possible); or
extra breaks or modified schedules.

As an employer, you also have health and safety duties under the Health and Safety at Work Act 2015. So if someone isn’t fit to safely perform their normal role, adjustments may be necessary - but they should be planned carefully so you’re not putting the employee (or others) at risk.

Handling Medical Information, Privacy, and Communication

When sick leave runs out, employers often feel stuck because they “don’t know what’s going on.” That’s understandable - but it’s crucial not to overstep.

Medical information is sensitive personal information. You can ask for what you reasonably need to manage the employment relationship, but you should avoid asking for unnecessary detail.

In New Zealand, you should also handle health information in line with the Privacy Act 2020 and the Health Information Privacy Code, including only collecting what you need, keeping it secure, and limiting who can access it.

What You Can Usually Ask For

Whether the employee is fit for work (yes/no).
Likely timeframe for return (even if it’s an estimate).
Work restrictions or accommodations required.
Whether a graduated return is recommended.

What to Be Careful About

Pressuring the employee to disclose their diagnosis when it’s not needed for work capacity decisions.
Sharing the employee’s health information with other staff.
Storing medical information insecurely or in places with broad access.

Good privacy practices reduce legal risk and help preserve trust. Many employers find it helpful to align their approach with an Employee Privacy Handbook style framework so managers know what to collect, who can access it, and how it should be stored.

Keep Communication Regular (But Not Intrusive)

Regular check-ins are usually a good idea, especially during longer absences. You’re not “chasing” the employee - you’re planning and supporting.

A practical approach is to agree on:

a check-in frequency (for example, weekly or fortnightly);
how check-ins will happen (email, call, meeting); and
what the check-in is meant to cover (health update at a high level, any change in return-to-work estimate, next medical certificate date).

When the Absence Becomes Long-Term: Medical Incapacity and Your Next Steps

If an employee’s sick leave runs out and they still can’t return to work after an extended period, you may start thinking about whether the role can remain open indefinitely.

This is where employers can get into trouble: terminating too quickly, failing to consult, or treating illness like misconduct. In most cases, the issue isn’t performance or behaviour - it’s capacity.

There’s No “Automatic” Right to Terminate After X Weeks

New Zealand law doesn’t give a simple rule like “after 8 weeks off, you can dismiss.” Instead, any termination decision must be:

substantively justified (there is a real inability to perform the role); and
procedurally fair (you followed a fair process).

What is “fair” depends on factors like:

the nature of the role and how critical it is to operations;
the likely timeframe for the employee’s return;
the length of absence to date;
whether you can reasonably accommodate adjustments;
the impact on your business (costs, staffing, service delivery); and
what the employment agreement says (including any medical incapacity clause).

A Sensible Medical Incapacity Process (High Level)

While every situation is different, a typical approach includes:

Gather information: confirm leave balances and request updated medical information about capacity and timeframe.
Meet with the employee: explain the operational impact, discuss their likely return, and explore options (adjustments, alternative duties, more time).
Consider alternatives: redeployment (if available), graduated return, temporary adjustments, or mutually agreed leave arrangements.
Warn and consult: if termination is a possibility, you should clearly communicate that outcome is being considered and give the employee a chance to respond.
Make a decision: only after considering all information and responses, and documenting your reasoning.

If you reach the point where termination is likely, you should get legal advice before you act. The process and paperwork matter, and mistakes can lead to personal grievances. If you need a starting point on the broader legal framework, Termination guidance can help you understand the common compliance pitfalls.

Notice, Final Pay, and Paperwork

If employment ends (whether by termination or resignation during an absence), you’ll need to handle:

notice periods (as per the employment agreement and legal requirements);
final pay calculations (including outstanding annual leave); and
clear documentation (letter outlining the outcome and reasoning).

In some situations, employers consider Payment In Lieu Of Notice, but whether that’s appropriate depends on the contract terms and the circumstances - so it’s worth checking before you make that call.

Don’t Forget Discrimination and Human Rights Risk

Where illness or injury amounts to a disability (in the broad sense used in NZ), there may be additional risk under the Human Rights Act 1993. This doesn’t mean you can never end employment on medical grounds - but it does mean you should be able to show you:

acted fairly and in good faith;
considered reasonable adjustments; and
didn’t make assumptions about the employee’s condition.

This is another reason why process, communication, and evidence are so important when sick leave runs out.

Key Takeaways

When an employee has run out of sick leave, you’re not automatically allowed to terminate - you need a fair, well-documented process based on the employee’s capacity and the impact on your business.
Start by confirming leave balances and checking the employment agreement for any additional entitlements or special rules.
Have an early, supportive conversation with the employee and request updated medical information focused on work capacity and likely return-to-work timeframes.
Consider practical options such as annual leave (where lawful), mutually agreed unpaid leave, advancing leave (if you choose), or a graduated return with modified duties.
Handle medical information carefully and keep it confidential, consistent with your privacy obligations and internal policies.
If the absence becomes long-term, a medical incapacity process should include consultation, consideration of alternatives, and a procedurally fair decision-making pathway.
Before taking steps like termination or payment in lieu of notice, it’s wise to get tailored advice - these situations are high-risk if handled informally.

What To Do When An Employee’s Sick Leave Runs Out In New Zealand