The Department for Work and Pensions (DWP) commissioned the report, by health and business experts Dame Carol Black and David Frost, in February. It said that the assessment plan could save employers £100 million a year,
The report (106-page / 1.6MB PDF) also proposed a state-supported 'job brokering' service, designed to help people who cannot carry out their current job find one that they can do with a different employer.
The authors suggested that costs associated with employing people with long-term health conditions, such as medical treatments or vocational rehabilitation, should attract tax relief.
Former head of the British Chamber of Commerce David Frost, who co-authored the report, said that its suggestions would help employers to make "informed judgments" about a return to work for their staff.
"Evidence clearly shows that the longer you are out of work the harder it becomes to get back in. But in many cases sickness absence is due to health conditions that are nonetheless compatible with work – and can often be improved by work," he said.
Each year around 11 million employees take sick leave, according to DWP figures. Although most of those people make a speedy return to work, around 300,000 go on to claim health-related benefits, it said.
The Government described this as a "huge loss in economic potential", which costs the taxpayer £13 billion in benefits each year while reducing economic output by £15bn.
Selwyn Blyth, an employment law expert with Pinsent Masons, the law firm behind Out-Law.com, described the report's recommendations as "innovative".
"The report opens with the presumption that work itself, and the right to work, is good for a person's wellbeing. It challenges the perception that sickness support is just a question of getting people out of the benefits system and back into work, and focuses on what they are capable of rather than what they are not capable of," he said.
"I suspect that there is some political agenda behind the findings, because the Government takes the view that the current benefits system is spiralling out of control."
The report recommended the introduction of a new Government-funded Independent Assessment Service (IAS), which would provide an in-depth assessment of an employee's physical and mental health along with advice about how that individual could be supported to return to work. It recommends that the service be used when an employee has been absent from work due to a health condition for more than four weeks.
"Currently the majority of people seeking a medical certificate are signed off as completely unfit. Unless this is addressed, employers cannot make adjustments to help people whose illness is compatible with a return to work. Solving this issue is the first crucial step in stemming sickness absence and inactivity," the report said.
"The primary role of GPs is the care and treatment of their patients and they do not have strong incentives to consider state and employer costs," it said.
A free state-supported job-brokering service could be offered to anybody with a sickness absence period of 20 weeks or more, the report said. The new system could save up to £300m a year, with an increase in economic output of up to £800m.
"Under the current system, there is a duty on an employer to make reasonable adjustments for an employee, although that system is geared more towards disability. Those adjustments can, in some circumstances, include redeployment which often proves controversial - a cynical employer could take the view that this is shifting the problem," Selwyn Blyth said.
"This tends to be more of an issue for smaller employers, who do not have as big a variety of jobs into which to move a worker who is perhaps not capable of a particular role. What the report's job brokering service idea does is extend this potential redeployment pool outside of the individual employer."
The introduction of an independent assessment service is another innovate idea, Blyth said.
"Taking the responsibility for employee assessment away from GPs removes the perception of a conflict of interest. It is the GP's role to advocate for the employee, and as GPs have on average eight minutes to see and assess a patient they are likely to resolve any doubt in favour of the employee. An independent assessor will still have to follow an ethical and professional code, but will not have the same duty to provide clinical care to the employee," he said.
To date employers have often funded in-house occupational health assessments, Blyth said. Although the report does not go into detail as to how the proposed assessment process would be funded, he said, the implication was that it would be publicly funded. However it would still be a generic assessment rather than an in-house assessment tailored to the needs of the employer and which understands the stresses and strains of that particular organisation.
"The question then becomes whose interests take precedence – the employer's or the employee's? If the employer chooses to continue to pay for a tailored in-house assessment, will the employee also have a right to see an independent assessor? And whose view takes priority if the two disagree?" Blyth said.
Lord Freud, Minister for Welfare Reform, welcomed the report and said that the Government would publish a response next year.
"The Government is committed to supporting more people with health conditions to work. The economy loses £15bn in lost economic output each year due to sickness absence and we cannot continue to foot this bill. But even more important is the impact of needless inactivity on people's lives; the damage to their aspirations and their health and the damage to their families and communities," he said.