Reporting later this year, the report will consider if the balance of the costs associated with sickness and absence are shared fairly between individuals, employers and the state.
The review has also been briefed, on focussing on SME's and smaller employers and ensuring that any of its recommendations are consistent with the governments promotion of private-sector growth and minimising the burdens on business.
Employment Relations Minister, Edward Davey said: "This is an important review which will help tackle the problems faced by business and individuals. Managing sickness absence more effectively will be a win-win situation for all - businesses, individuals, the taxpayer and crucially, the economy. It could improve productivity, boost growth and mean that many more people no longer have to rely on taxpayer handouts."
The review will be fed into the wider Employment Law Review, which is looking at measures to reduce red tape and remove the burdens on business.
The manufacturing employers' group, the EEF, has welcomed the move commenting that despite the changes last April with the introduction of a fit note rather than the old sick note system there are still barriers remaining to getting people back to work.