Unfair Dismissal Claims: What Australian Small Business Owners Need to Know

The Fair Work Commission receives tens of thousands of unfair dismissal applications every year. A significant proportion come from employees of small businesses — where disputes are often more personal, documentation is frequently incomplete, and the financial stakes are high on both sides.

Understanding your obligations before you terminate an employee — not after — is the only way to protect your business.

What Is Unfair Dismissal?

Under the Fair Work Act 2009, a dismissal is unfair if it was:

• Harsh, unjust, or unreasonable; and
• Not a case of genuine redundancy; and
• Not consistent with the Small Business Fair Dismissal Code (if it applies)

The Fair Work Commission assesses whether a dismissal was unfair based on a number of factors, including whether there was a valid reason for the dismissal related to the employee's conduct or capacity, whether the employee was notified of that reason, and whether they were given an opportunity to respond.

Who Can Make an Unfair Dismissal Claim?

Not all dismissed employees are eligible to bring an unfair dismissal claim. To be eligible, an employee must:

1. Have completed the minimum employment period
2. Be earning at or below the high income threshold (currently $175,000 per year), unless covered by a modern award or enterprise agreement

The Minimum Employment Period

The minimum employment period before an unfair dismissal claim can be made differs based on employer size:

• Small businesses (fewer than 15 employees): 1 year of employment
• Other businesses: 6 months of employment

This is a significant protection for small businesses — you have more time to assess whether an employee is suitable without facing unfair dismissal exposure.

The Small Business Fair Dismissal Code

Businesses with fewer than 15 employees at the time of the dismissal must follow the Small Business Fair Dismissal Code (the Code) when dismissing employees. If you comply with the Code, the Fair Work Commission must find the dismissal was not unfair — even if it could be argued that the outcome was harsh.

The Code covers two scenarios:

Summary Dismissal (Serious Misconduct)

You may dismiss an employee without notice or warning if you believe on reasonable grounds that they have engaged in serious misconduct. Serious misconduct includes:

• Theft or fraud
• Physical violence
• Serious and wilful neglect of duty
• Conduct that causes serious and imminent risk to WHS

The key requirement is that your belief is reasonable — meaning you investigated the allegation and had a genuine basis for concluding the conduct occurred.

Other Dismissal (Conduct, Performance, or Capacity)

For dismissals that are not for serious misconduct, the Code requires you to:

1. Give the employee a warning — tell them their job is at risk if their conduct or performance does not improve
2. Give them a reasonable opportunity to improve — the time allowed must be reasonable given the nature of the issue
3. Hear their response — before dismissing, give the employee an opportunity to respond to the reason for dismissal
4. Consider their response — genuinely consider what they say

There is no set number of warnings required under the Code — one clear, documented warning can be sufficient in many cases. However, the warning must be genuine: it must put the employee on notice that they are at risk of losing their job.

Common Mistakes That Lead to Successful Unfair Dismissal Claims

1. Not Documenting Warnings

A verbal warning that is not recorded is very difficult to rely on if an unfair dismissal claim is lodged. The Commission will be presented with two conflicting accounts — and without documentation, the employee's version often prevails.

Always issue written warnings. Document the date, the reason, what improvement is required, and the consequence of non-improvement. Have the employee acknowledge receipt (they do not have to agree with the warning).

2. Not Giving the Employee a Chance to Respond

Before you terminate an employee (other than for serious misconduct), you must put the reason to them and give them a genuine opportunity to respond. This means:

• Telling them in clear terms why you are considering dismissing them
• Giving them adequate time to prepare their response (not asking for an immediate answer in the same meeting)
• Genuinely considering what they say before making your final decision

Many small business owners skip this step because the outcome feels inevitable. But the opportunity to respond is a standalone right — even if the employee's response would not change the outcome.

3. Dismissing Without the Right Minimum Period Having Passed

Terminating an employee after 11 months assuming you are safe from unfair dismissal claims is only valid if you are a small business. If you have 15 or more employees, the minimum period is 6 months — meaning a termination at month 7 is fully exposed.

4. Calling a Redundancy That Is Not Genuine

If the position is not actually redundant — if you advertise the same role shortly after, or the work continues to be performed by others — the dismissal can be found to be an unfair dismissal, regardless of what you called it.

5. Dismissing During a Protected Period

Employees have general protections against adverse action (including dismissal) related to:

• Taking protected industrial action
• Making a complaint or inquiry to a regulatory body
• Exercising a workplace right
• A discriminatory attribute (e.g., pregnancy, disability, union membership)

A dismissal timed shortly after any of these activities will attract significant scrutiny.

The Unfair Dismissal Process

An unfair dismissal application must be lodged with the Fair Work Commission within 21 days of the effective date of dismissal. This deadline is strict — late applications are rarely granted.

The process typically works as follows:

1. The Commission serves the application on the employer and asks for a response
2. A conciliation conference is scheduled (most matters settle at conciliation)
3. If no settlement, a hearing is conducted and the Commission makes a decision

What Remedies Are Available?

If the Commission finds a dismissal was unfair, it can order:

• Reinstatement — the employee is reinstated to their former position (or a comparable one)
• Compensation — up to 26 weeks' pay, capped at the high income threshold

Reinstatement is the primary remedy, but the Commission will order compensation if reinstatement is not appropriate (e.g., where the employment relationship has irreparably broken down).

The High Income Threshold Exception

If an employee earns above $175,000 per year and is not covered by a modern award or enterprise agreement, they cannot make an unfair dismissal claim — regardless of how the termination was handled. However, these employees may still be eligible for general protections claims, which have no income threshold.

Before You Terminate: A Practical Checklist

Before terminating any employee:

• [ ] Confirm the minimum employment period has not been reached (or that you have grounds for summary dismissal)
• [ ] Review what modern award or enterprise agreement applies
• [ ] Check whether the dismissal could be characterised as a genuine redundancy
• [ ] Confirm you have documented warnings (for conduct/capacity dismissals)
• [ ] Schedule a meeting and put the reason for termination to the employee
• [ ] Give the employee adequate time and opportunity to respond
• [ ] Genuinely consider their response
• [ ] Prepare a written termination letter specifying the reason and effective date
• [ ] Calculate all final pay obligations: notice, accrued leave, long service leave

How Reguladar Helps

Employment termination is one of the highest-risk areas of compliance for Australian SMBs. The rules vary based on your business size, the applicable award, the reason for dismissal, and the employee's length of service.

Reguladar tracks your employment law obligations and surfaces your specific exposure — including the applicable minimum employment period, award requirements, and the steps you need to take before terminating. It is the compliance layer that helps you act confidently when difficult employment decisions arise.

Protect your business before the next difficult conversation. Start your free compliance check at Reguladar and understand your obligations today.