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Employers guide to fairly terminating an employee

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A common misconception is that employers can solely rely on the terms of their employment contracts when terminating an employee.

While an employment contract may give employers a contractual right to terminate their employees, the Fair Work Act 2009 (Cth) sets out the circumstances in which employees will be entitled to protection from unfair dismissal.

So how do you fairly terminate an employee so that you, the employer, are protected from a potential unfair dismissal claim?

When is an employee protected from unfair dismissal?

An employee is protected from unfair dismissal if the employee:

  • has completed at least the minimum employment period with the employer; and
  • is covered by a modern award or an enterprise agreement; or
  • has an annual earnings rate less than the high income threshold ($158,500 as at 1 July 2021 and indexed each financial year).

Minimum Employment Period

If your business employs less than 15 employees, an employee can only make an unfair dismissal claim if they have been employed for at least 12 months.

In the alternative, an employee can only make an unfair dismissal claim if they have been employed for at least 6 months where your business employs 15 or more employees.

What to do if employee is entitled to protection from unfair dismissal?

If the employee is entitled to protection from unfair dismissal, when terminating the employee you will need to ensure that:

  • the dismissal is not a case of genuine redundancy;
  • where you are a small business, the dismissal is not inconsistent with the Small Business Fair Dismissal Code;
  • the dismissal is not harsh, unjust or unreasonable.

You can read our Employers Guide to Redundancy if you’re unsure whether a dismissal is a case of genuine redundancy.

When is a dismissal not harsh, unjust or unreasonable?

Terminating an employee will not be deemed harsh, unjust or unreasonable if there is a valid reason for the dismissal related to the employee’s capacity or conduct and the employee is:

  • notified of that reason;
  • where the reason relates to unsatisfactory performance, warned about the unsatisfactory performance before they are dismissed;
  • given an opportunity to respond; and
  • allowed to have a support person present to assist at any discussions relating to dismissal.

What to do when you’ve decided to terminate an employee?

If you’ve made a decision to terminate your employee, you must given them written notice which confirms:

  • the valid reason for the dismissal;
  • the notice period that applies to their employment;
  • whether the employee is required to work through the notice period or whether they will be paid in lieu of notice; and
  • the value of statutory employee entitlements that will be paid to them on termination.

How much notice is an employee entitled to?

The amount of notice an employee should be given will depend on their age and how long they have been employed by you on a continuous basis.

However, if the employee’s employment contract entitles to employee to a longer notice period, then that is the notice period that will apply on the termination of their employment.

What entitlements should be paid on termination?

When terminating an employee, you should pay them the following entitlements in their final pay:

  • any outstoutstanding wages or other remuneration still owing;
  • pay in lieu of notice of termination (if applicable);
  • accrued annual leave and long service leave entitlements;
  • the balance of any time off instead of overtime that the employee has accrued but not yet taken;
  • any redundancy pay or entitlements if the employees has been made redundant and is eligible.

What do I do if you’ve received an unfair dismissal application?

If you’ve terminated an employee and they have lodged an unfair dismissal application:

  • you must consider whether the employee has lodged the unfair dismissal application within 21 days of their dismissal taking effect;
  • you will be required to submit an employer response form within 7 days of receipt of the employee’s unfair dismissal application; and
  • the Fair Work Commission will schedule a conciliation conference between the parties in an attempt to resolve the matter.

If you cannot reach an agreement/settlement with the employee before, during or after the conciliation conference that will be scheduled by the Fair Work Commission, the matter will proceed to a conference or hearing.

What can an employee seek in an unfair dismissal application?

If an employee has been unfairly dismissed, they may be eligible to make a claim for compensation or reinstatement through an unfair dismissal application lodged with the Fair Work Commission.

The maximum amount of compensation a dismissed employee can claim is the lesser of:

  • half of the employee’s annual wage; and
  • $79,250 (as at 1 July 2021).

When will an unfair dismissal application be successful?

An employee’s unfair dismissal application will be successful if the employee was dismissed:

  • without receiving a clear reason; or
  • without receiving a fair chance to respond to the reasons for dismissal; or
  • for poor performance, but did not receive clear warnings or opportunities to improve their performance.

Where you follow the above guide, you will minimise the likelihood of an employee lodging an unfair dismissal application with the Fair Work Commission or succeeding in an unfair dismissal application.

How we can help

  • Advise you on how to best carry out a termination of employment
  • Prepare internal processes and procedures to manage an employee’s capacity or conduct
  • Prepare template and bespoke warning and termination letters
  • Help you understand and calculate notice and final pay requirements
  • Provide pragmatic advice to mitigate employment risk and prevent unfair dismissal, unlawful termination or discrimination claims