Unfair dismissal in Australia: an employers’ guide

Whether it’s due to business downsizing, poor performance, or site closure, terminating employment contracts is one of the harder parts of working in HR. While it’s tempting to get it over and done with as quickly as possible, it’s vitally important to ensure correct procedures are followed to mitigate the risk of unfair dismissal claims. 

According to the Fair Work Commission (Fair Work Act, section 385), a dismissal is unfair if it is “harsh, unjust or unreasonable,” “not a genuine redundancy,” or does not “follow the Small Business Unfair Dismissal Code” (if the employer is a small business). 

Not all dismissals are unfair – for example, if an employee has their role terminated for stealing from their employer, consistently underperforms, or because their contract has ended, that does not count as unfair dismissal. 

Workers must also not be selected for redundancy or dismissal based on protected attributes (such as race, sexual orientation, age, disability, or caring responsibilities), political opinion, temporary absence due to illness or injury, parental leave, trade union membership, absence to participate in voluntary emergency management activity, or participation in legal proceedings against the employer.

Some employment contracts are ended for perfectly valid reasons and would not meet the threshold to be considered as unfair dismissal. For example: 

• Anna has been underperforming for several months. She has received verbal and written warnings about her performance as well as coaching from a more senior colleague. Despite this, her performance remains below the expected level so she is dismissed. 
• Arthur has been working at a company for 6 years and planned to stay until retirement age, but the company is making redundancies. They identify roles that no longer need to be performed by anyone, and Arthur’s job is at risk. Following consultations, Arthur is told his role is being eliminated and he is given fair notice and redundancy pay. 
• Sam was hired on a 3 month contract over the summer, to support the business through a peak trading period. They are let go at the end of the 3 months as planned. 

If the termination doesn’t follow the correct procedures, the business is opening itself up to unfair dismissal claims. For example: 

• A customer complained that Anna used inappropriate language in front of them. There is no investigation to confirm this and Anna has never done this before. Anna would have grounds for an unfair dismissal claim as she is not guilty of this behaviour and the dismissal was an extreme response to the situation. 
• Arthur is made redundant, but the company does not follow its legal obligations by holding a consultation or trying to redeploy him to another role within the business. He can claim unfair dismissal as the redundancy was not genuine. 
• Sam was hired on a 3 month contract but was only needed for two months and was dismissed a month early. They claim unfair dismissal due to breach of contract. 

National system employees can claim unfair dismissal if they have been employed for at least 6 months (or a year, if the employer is a small business). They also need to earn less than the high income threshold ($190,100 per year) and be covered by a modern award or enterprise agreement. 

Employees have 21 days to apply for unfair dismissal and the Fair Work Commission will contact the employer within 5 days of receiving the application. The employer then has 7 days to respond. 

If the employer objects to the application, a voluntary conciliation meeting can be held. Often, a settlement is agreed at conciliation. Cases not resolved at conciliation are heard at a jurisdictional hearing, several months after the application, where the application can be dismissed, closed, or continued. Evidence is heard by a Commission Member, who will decide whether the dismissal was unfair. Appeals are possible within 21 days of the decision. 

The Small Business Fair Dismissal Code applies to employers with fewer than 15 employees. Employees cannot make unfair dismissal claims within the first 12 months of employment and cannot bring claims due to business downturns or role redundancy (as long as the redundancy is genuine). 

Small business employees can be dismissed without notice or warning when their conduct is serious enough to justify it and the employer has reasonable grounds. Otherwise, the employer must give valid reasons for dismissal based on conduct or capacity. Warnings, verbal or written, must be given, and the employer must provide an opportunity to respond and rectify the problem. 

The employee may have another person present to help them during proceedings, as long as the person is not a lawyer. The employer will need to provide evidence that they have complied with the Small Business Fair Dismissal Code if a claim is made. 

For national system employees, unfair dismissal regulations are the same regardless of which state the employer operates in. Unfair dismissal is decided on a federal basis and governed by the Fair Work Act for these employees. 

In some states, public sector workers and non-corporate employers may be covered by individual state industrial bodies instead. The main exception is the Western Australia Industrial Relations Commission, with Queensland, New South Wales, and South Australia also having state tribunals for public servants and government workers. 

Unfair dismissal claims are damaging to employers on both a financial and reputational basis. 

Financially, the median compensation for unfair dismissal is between 5 and 7 weeks’ pay. Maximum payouts are capped at half the employee’s annual wage or the compensation cap ($95,050 currently) – whichever is the lower. 

Reputationally, the damage is more public and lasts longer. Claims become part of the public record, as Fair Work Commission decisions are published online and employees frequently post about their experiences on social media and employer review sites. 

That then negatively impacts recruitment, as it raises red flags about the workplace culture, job security, and leadership competence. If internal morale takes a hit, the business experiences higher turnover at the same moment that recruitment becomes harder. 

More widely, negative press impacts trust in the business, potentially driving away clients and damaging the company’s reputation within the industry. 

The fallout from unfair dismissal claims is exactly why it’s so important to follow the correct layoff procedure – or at least to mitigate the damage if it’s too late. 

If the Fair Work Commission decides that a dismissal was unfair, they may order a remedy in the form of reinstatement or compensation. Compensation will only be awarded if the Commission decides that reinstatement is inappropriate. 

Reinstatement can be to the original position, or to an alternative position within the business, as long as the terms and conditions are no less favourable. The Commission can also order continuity of employment to be maintained and for lost pay to be restored. 

Compensation is determined based on viability to the employer, length of service, pay not received, efforts to mitigate loss, and earnings from other work since the dismissal. The amount can be reduced by misconduct, but does not include payment for shock, distress, or humiliation. 

Taking a people-first approach is the best way to avoid unfair dismissal claims. Employees who feel seen, cared for, and supported through the transition are less likely to feel aggrieved and pursue legal action. 

Outplacement is an increasingly popular service that employers use to protect their reputation and minimise the risk of unfair dismissal claims. Partnering with an outplacement firm means that affected employees are supported back into meaningful new work, as quickly as possible, while the business navigates back to a new normal. 

Careerminds boasts a 95% placement rate for participants on its outplacement programs, with displaced employees landing new roles within an average of 12 weeks. 

Maintaining full and accurate documentation throughout the dismissal process ensures that the employer is in a position to provide full evidence if a claim is pursued. This shows the Fair Work Commission that there was an attempt to follow fair process, even if there was a technical breach. If there was no breach, the documentation can mean the claim is dismissed. 

Three out of 4 unfair dismissal claims are settled at conciliation, according to the Fair Work Commission. Although voluntary, pursuing the option for conciliation gives the business the opportunity to reach an early settlement, negotiate confidentiality, and avoid the publicity of a Fair Work Commission decision. 

Line managers and business leaders should be trained in managing redundancies and terminations, ideally before any dismissals are planned to take place. Empowering employers to terminate employees in a lawful manner significantly reduces the risk of future claims. 

Ongoing proactive and transparent staff communications, including the rationale behind downsizing initiatives and written conduct policies, will also build employee trust and reduce claim risk. 

Of course, it’s better to conduct a fair dismissal process than to pick up the pieces when one has backfired, so let’s look at the steps involved in a fair and compliant dismissal. 

1. Ensure the reason is valid

Assess the reason for the termination – harsh, unjust, and unreasonable dismissals are unfair, as are non-genuine redundancies. 

2. Give warnings 

Provide verbal and written warnings in the case of conduct and performance terminations, and ensure the employee is provided with adequate opportunity to improve. 

3. Offer the opportunity to respond

The employee must be given the opportunity to respond to the dismissal and is entitled to have another person supporting them. Redundancies must include a two-way consultation. 

4. Calculate notice and final pay

Entitlements include outstanding wages and other owed remuneration, pay in lieu of notice, accrued leave entitlements, eligible redundancy pay, and severance awards if applicable. Notice periods must be in line with statutory minimum and contractual terms. 

5. Document

Keep written notes of all proceedings, to support the business in case of future claims. Include dates of warnings, support provided, redundancy consultations, notice period, final pay, and severance packages. Issue an Employment Separation Certificate if requested. 

An employee can bring an unfair dismissal claim if they resign. This usually happens if the employee feels forced to resign due to their employer’s behaviour, and is known as forced resignation or constructive dismissal. Examples include demotions, changes to location or hours, bullying, and unsafe environments. 

Employees can be dismissed without notice, but only in the most serious cases – such as theft, fraud, violence, and drunkenness. For dismissal outside of serious misconduct, notice must be given and proper procedure must be followed. 

Evidence of unfair dismissal will differ on a case-by-case basis, but the Fair Work Commission will evaluate employment contracts, performance appraisals, termination letters, payslips, employment separation certificates, training records, HR files, meeting minutes, and witness statements.

Unfair dismissal claims are a huge financial and reputational risk to a business. Following fair process and offering outplacement to affected employees is the easiest way to mitigate that risk. 

Contact Careerminds before terminating any contracts, to find out how we can help you to protect your reputation and minimise unfair dismissal proceedings.