In the defense of the "small company" its really tough out there right now for companies to even make a profit and stay in business. Carrying dead weight employees that are not performing could cost the entire company their jobs, not just her. By her own admission its her personal life that is the root cause of the depression and also by her admission the job is what is suffering. While I feel for her and recognise how cripling depression can be is her welbeing more important than that of an entire company? What if her salary is the difference between the company limping on vs closing down? Is it fair on her work collegues? I know this sounds harsh but one has to think about other people's issues as well. If the job was a major factor in having caused the depression (ie via abusive managers, unrealistic work pressure, etc) then sure, take them to the cleaners. This sounds a lot more like someone who's personal life is falling apart and its the company that has to pay alongside the employee. I'm not sure I agree with it. It does not feel right that the company just has to swallow the fact that they have to pay someone for doing a lot less.
Just my 2c. Also I would never admit depression to a boss. I know some people that had some really bad things happen that caused depression and by keeping it quiet and managing to fix the circumstances they got over the depression without the company ever realizing. Once a company knows you have ever had depression word gets around and it becomes impossible to ever promote the person as you are terrified the additional stress of the promotion will send them back there. Also if you do have depression sometimes it results in managers overanalysing your performance or treating you differently to other employees that can add its own stress. Seriously, I would think twice.