Managing performance is rarely straightforward—but when mental health concerns are involved, the stakes become even higher. Recent Fair Work Commission (FWC) cases in Australia have underscored the importance of balancing legal obligations with a fair and compassionate approach to employees experiencing psychological challenges.
Mental Health and Performance: Striking the Right Balance
Underperformance typically follows a pattern—missed deadlines, poor communication, or declining output. However, when an employee is grappling with mental ill-health, whether disclosed or not, the approach requires greater sensitivity.
Mental health concerns do not excuse underperformance, but they do call for a measured and legally compliant process. HR professionals must navigate a complex space—supporting the individual while ensuring the business’s operational needs are met. Get this wrong, and the consequences can be serious, ranging from claims of discrimination and unfair dismissal to psychological injury claims.
According to Safe Work Australia, mental health conditions accounted for 11% of all serious workplace claims in 2022–23. That figure highlights the importance of approaching these situations carefully and thoughtfully.
Reasonable Adjustments: Supporting Employees Fairly
Where mental health may be affecting performance, it’s essential to consider whether workplace factors or psychosocial hazards are contributing. Employers are expected to explore reasonable adjustments, such as flexible hours, reduced workloads or temporary changes to duties.
These adjustments not only help support the employee but may also improve their performance and well-being. If, after reasonable support, performance concerns continue, any steps toward termination must be well-documented and procedurally fair. This includes:
- Providing written warnings and clear expectations
- Giving the employee the opportunity to respond
- Allowing a support person to attend meetings
- Documenting all discussions and outcomes
Failing to follow proper process can result in legal challenges and reputational damage.
Legal Considerations When Mental Health is a Factor
Here are three key legal considerations when handling dismissals where mental health may be influencing behaviour or performance:
1. Discrimination Claims
Mental health conditions are generally protected under the Disability Discrimination Act 1992. If an employee is dismissed due to conduct related to a mental illness—without efforts to reasonably accommodate them—the employer may be in breach of anti-discrimination laws.
In one recent FWC case, an employee suffering from PTSD, anxiety and depression alleged she was unfairly dismissed. Although she missed the 21-day application deadline, the FWC accepted the late claim due to the impact of her mental health conditions. This serves as a strong reminder for employers to tread carefully and consult legal advice where necessary.
2. Extensions for Unfair Dismissal Claims
Generally, employees have 21 days to lodge a claim for unfair dismissal. However, if mental ill-health has prevented an employee from lodging within that timeframe, the FWC may grant an extension—if the delay is deemed reasonable and the claim has merit. While this is not guaranteed, it does highlight the need for employers to document processes thoroughly and act in good faith.
3. Psychological Harm from the Dismissal Process
Even if a dismissal is legally justified, how it is handled can have psychological implications. In one notable case, a small business was ordered to pay compensation because of the way the dismissal was carried out. The process lacked transparency and procedural fairness, and the FWC found that it exacerbated the employee’s existing mental health issues.
To reduce this risk, HR professionals should:
- Clearly explain the reasons for dismissal
- Offer a support person during formal meetings
- Refer the employee to appropriate support services such as EAPs (Employee Assistance Programmes)
- Avoid making abrupt or poorly communicated decisions
A Fair and Compassionate Exit Strategy
Managing underperformance is part of running any business, but when mental health concerns are involved, employers must proceed with caution, empathy, and rigour. Dismissing someone who is unwell—without appropriate adjustments or procedural fairness—can have significant legal, reputational and human consequences.
Ultimately, the goal is to maintain high standards while also promoting psychological safety. That means having honest conversations, providing appropriate support, and handling exits with dignity and care. It’s not just good practice—it’s your legal and ethical responsibility.
