Disucss this issue with a NYS employment lawyer. In general terms NYS is an employment at will state and you may dismiss employees at any time without a reason as long as it is not discriminatory (i.e. the only reason for the dismissal is the illness). The law expects you to make reasonable accomodations for a disabled person. Her demands may not meet the legal definition of "legal." For the most part employers with less than 50 employees do not have many of the obligations as larger ones do. You can stop health benefits with termination as long as you offer COBRA continuation. (employee pays for benefit). You can further protect yourself from suit by hiring a private investigator to find out how genuine her disability is.
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Mr. Sarno is licensed to practice law in NJ and NY. His response here is not legal advice and does not create an attorney/ client relationship. The response is in the form of legal education and is intended to provide general information about the matter in question. Many times the questioner may leave out details which would make the reply unsuitable. Mr. Sarno strongly advises the questioner to confer with an attorney in their own state to acquire more information about this issue.
It would be advisable for you to continue with her health benefits until her employment is terminated. She should be able to exhaust all available sick time and perhaps any accrued vacation time. You may want to help her file a disability claim -if one is available. Once you establish that she has no intention of returning to work you may seek to find a replacement. Of course, make sure all of the the steps I just described are well documented. Finally and most importantly, don't be penny-wise and pound-foolish. Spend the money and get good face-time from an employment/labor law attorney. Best wishes.