Watkins claimed her dismissal was "unjustified" and challenged the procedural aspects of the investigation leading to her dismissal.
She sought interim reinstatement until her grievance claims could be fully considered.
The Hospice asserted to the ERA that Watkins' dismissal was justified and opposed her reinstatement.
Chief executive Peter Bassett has expressed concern that Watkins' reinstatement may cause other staff to leave.
Watkins began working for the Whakatāne-based centre in 2013 and in March 2020 her employer issued a final written warning for serious misconduct valid for 12 months.
The warning related to her swearing at another staff member.
Then in December last year, one of her work colleagues, Ms R, did not arrive at work on time which was out of character.
Another colleague stated in front of Watkins and others that the absent staff member did not have a good home life and expressed hope that she was okay.
Watkins, who had previous work experience in the field of domestic violence, took this to mean Ms R might have been the victim of domestic violence.
The next day these safety concerns were raised by Watkins and another staff during a clinical team meeting attended by Ms R.
There was some dispute who raised the matter first, but other staff at the meeting say Watkins added that Ms R either could have or was the subject of domestic violence.
Watkins denied shouting at the meeting but conceded she swore because she was angry because Ms R was dismissive about their genuine concerns.
Ms R later apologised to Watkins which was accepted, the ERA report said.
However, Ms R lodged a complaint to Hospice saying incorrect information had been disclosed by Watkins which was "publically embarrassing" and a "personal attack".
Bassett met with Watkins the next day and then launched a formal investigation, which involved interviews and meetings with the parties and other staff.
Bassett wrote to Watkins on January 12 which included the allegation by Ms R, and the parties met on January 26 - two staff provided support statements for Watkins.
Watkins' legal representative also spoke to Hospice employee witnesses.
The ERA report said Bassett concluded that Watkins had taken an opportunity to raise an untrue comment about Ms R which was disguised as genuine concern for a colleague.
Bassett concluded that Watkins' intention was to harm or upset Ms R which was "not consistent with the Hospice's value of respect".
Watkins' employment was terminated in a February 19 letter saying she had breached Hospice's policies and not acted as an experienced professional was expected to behave.
Hospice paid her an amount equivalent to her eight weeks' notice period.
Craig said it was arguable there was "some incongruity" in the Hospice's reliance on Watkins disclosing information.
She said there was also some evidence other staff also swore in the workplace.
"It appears there was no disciplinary action taken in relation to Ms S or Ms U, and Ms Watkins unsurprisingly raises a question about the disparity of treatment."
Craig said information obtained by the chief executive in the second round of his inquiries with witnesses should have been disclosed to Watkins and her legal representative.
No written record of a January 26 meeting between Bassett and Watkins to discuss Ms R's complaint was provided to her, she noted.
Craig also said there was "substantial resistance" to Watkins returning to working for Hospice both by Bassett, another manager Ms T and some other staff.
There was criticism of Watkins' workplace approach and behaviour, she said.
Bassett said that in a signed letter on Hospice letterhead the majority of staff indicated they did not want Watkins to return. This included Ms R, who says she would "almost certainly" be forced to leave if Watkins returned. Watkins' former manager says she would "consider retiring immediately" if she returned.
However, affidavit evidence from three other staff cited Watkins' "positive and worthwhile role".
Craig said the possibility of a group of staff struggling to work together in a health sector organisation providing important services to the public was "disquietening".
She said it was clear the workforce was divided.
"It would not be right at this point to make a firm finding on whose fault that was.
"On the evidence, before me, it does appear that Ms Watkins' interim reinstatement claim is being used as an opportunity to pursue concerns about her which was very largely not raised or progressed previously."
Craig said she was satisfied there was an arguable case that Watkins had been unjustifiably dismissed and granted Watkins application for interim reinstatement.
She ordered Hospice to reinstate Watkins into her paid role within seven days.
"Both parties are to co-operate with all reasonable steps taken to return Ms Watkins to work and ensure that working relationships are operating satisfactorily."
Craig said the Authority would contact the Hospice again regarding the next steps in these proceedings and reserved the question of costs.