Unfair dismissal small business Australia: key rules & traps

You’ve just handed a termination letter to an employee and the clock is ticking on a potential unfair dismissal claim, so this guide will settle what the rules are for unfair dismissal small business Australia, the timelines you must meet, and the common traps to avoid.

unfair dismissal small business Australia

In Australia a dismissal is unfair when the employer cannot show a valid reason related to the employee’s capacity or conduct, or when the reason is not communicated properly, and the action is harsh, unjust or unreasonable. For a small business – defined as fewer than 15 employees – the unfair dismissal regime applies once the employee has worked for you for at least 12 months. The Fair Work Commission will look at whether you followed a fair process, gave the employee a chance to respond, and whether the outcome was proportionate to the issue. If any of those steps are missing, the claim is likely to succeed. Knowing this baseline helps you decide whether to negotiate a settlement early or to prepare a defence that meets the statutory requirements.

Minimum employment period and eligibility

The first hurdle is the employment period. An employee must have completed at least six months of continuous service with a larger employer, but for a small business the threshold rises to 12 months. If the employee is under 18 years old, the period drops back to six months regardless of size. To protect yourself, check the start date on the contract, any breaks in service, and whether the employee was on unpaid leave that might reset the clock. If the 12-month mark has not been reached, the claim cannot proceed under the unfair dismissal regime, though other remedies may still exist. Confirm the employee’s start date against your payroll records and note the date in your HR calendar so you never miss the eligibility window.

When a dismissal is harsh, unjust or unreasonable

Even with a valid reason, the way you act can turn a lawful termination into an unfair one. A dismissal is harsh if the penalty is disproportionate to the misconduct – for example, firing an employee for a single minor breach without warning. It is unjust when the employer fails to follow a fair process, such as not providing a written statement of the reason or not giving the employee a chance to improve. Unreasonable dismissals occur when a reasonable person would not have taken the same action in the circumstances, often because alternative measures like redeployment or training were ignored. To avoid these pitfalls, document every step, hold a meeting to discuss concerns, issue a formal warning, and keep records of any performance plans. Acting transparently reduces the risk of a claim succeeding.

The Small Business Fair Dismissal Code explained

The Small Business Fair Dismissal Code sets out a simple eight-step process that small employers must follow before terminating an employee. Steps include: confirming the reason is genuine, investigating the matter, notifying the employee in writing, providing a reasonable chance to respond, and offering a right to appeal internally. If the code is followed, the Fair Work Commission is more likely to dismiss the claim as not meeting the unfair dismissal criteria. Many owners skip steps or rush the paperwork, which defeats the purpose of the code. Using a fractional HR partner can keep the process on track – see how ACTIv8 works for a practical example of a compliance checklist that aligns with the code. When the code is applied correctly, you also demonstrate good faith, which can be a decisive factor if the matter reaches a tribunal.

Common process mistakes that lose cases

Even seasoned managers slip up on the procedural side. The most frequent errors are:

• Failing to give written notice of the reason for termination.
• Skipping the mandatory meeting to discuss the issue and not recording the employee’s response.
• Not allowing a reasonable period for the employee to improve performance before deciding to dismiss.
• Overlooking the requirement to offer a right of internal appeal.
• Missing the 21-day deadline to lodge an unfair dismissal application, which can be fatal to your defence.

Each mistake can be avoided by following a checklist and assigning a single point of contact for the dismissal process. If you need a ready-made checklist and ongoing support, compare plans and pricing to see which fractional HR package fits your budget.

Questions we hear about this

Do I need to give a warning before I can dismiss?

While the law does not require a formal warning for every case, a documented warning is strong evidence that you gave the employee a chance to correct the issue, which reduces the risk of the dismissal being seen as harsh or unreasonable.

What if the employee claims they were forced to resign?

A forced resignation is treated as a dismissal. You must show the employee voluntarily resigned and that no undue pressure was applied. Keeping written records of all conversations helps prove this.

Can I settle the claim out of court?

Yes, most parties reach a settlement before the Fair Work Commission hearing. A settlement can include reinstatement, compensation, or a mutual separation agreement. Early settlement saves time and legal costs, but ensure any agreement is documented and signed.

If the people stuff keeps landing on your desk, talk to ACTIv8. A senior HR team behind your business, working your hours, billed monthly and never upfront.