You’ve made the difficult decision to let someone go. Now what?
For small business owners across Australia, dismissing an employee can be one of the more challenging parts of running a business. If the process is handled incorrectly, you could face an unfair dismissal claim, legal expenses, and significant time spent dealing with a workplace dispute, even when you had a legitimate reason for the dismissal.
The good news is that small businesses have a specific legal framework to follow when dismissing an employee. Following the Small Business Fair Dismissal Code, giving the employee a reasonable opportunity to respond, and keeping proper records can help demonstrate that the dismissal was fair.
This guide on Twastia Blog explains what unfair dismissal for small businesses in Australia means, who is covered, what the Small Business Fair Dismissal Code requires, and the steps employers should consider before ending an employee’s employment.
What Counts as a “Small Business” Under Fair Work Law?
Before anything else, you need to know whether the small business rules apply to you.
Under the Fair Work Act, a small business employer generally has fewer than 15 employees. The employee count can include casual employees who are employed on a regular and systematic basis, as well as employees of associated entities.
For example, imagine a café owner in Melbourne who has 8 full-time employees, 3 part-time employees and 2 casual employees who regularly work every Friday and Saturday night. Those employees may all be included when determining whether the business is a small business employer.
Why does this matter?
Employees of small business employers generally need at least 12 months of continuous service before they can make an unfair dismissal application. For employees of larger businesses, the minimum employment period is generally 6 months.
However, meeting the minimum employment period is only one part of unfair dismissal eligibility. Other requirements can also apply, so employers should consider the employee’s circumstances and the applicable workplace rules before making a decision.
The Small Business Fair Dismissal Code: Your Legal Framework
The Small Business Fair Dismissal Code is an important part of the dismissal process for employers with fewer than 15 employees.
The Code sets out the process small business employers should follow when dismissing an employee. If an unfair dismissal application is made, evidence that the employer followed the Code can be important when the Fair Work Commission considers whether the dismissal was fair.
The Code broadly deals with two situations.
Summary Dismissal
Summary dismissal may apply where an employee has engaged in serious misconduct. Examples can include theft, fraud, violence, serious breaches of workplace safety rules, or other conduct that seriously damages the employment relationship.
In these circumstances, immediate dismissal may be appropriate depending on the facts. However, employers should still establish reasonable grounds for believing the serious misconduct occurred and follow a fair process where appropriate.
Dismissal for Performance or Conduct Issues
A more common situation involves an employee whose performance or conduct is not meeting reasonable workplace expectations.
In these circumstances, the employer should generally:
- Have a valid reason related to the employee’s conduct or capacity
- Clearly explain the performance or conduct problem
- Give the employee a reasonable opportunity to respond
- Give the employee an opportunity to improve where appropriate
- Provide appropriate warnings where the issue is ongoing
- Allow the employee to have a support person at a dismissal meeting if they request one
The exact process will depend on the circumstances. Employers should avoid treating every dismissal in exactly the same way, particularly where serious misconduct, health issues, redundancy, or other legal considerations are involved.
What It Can Cost to Get the Process Wrong
If the Fair Work Commission finds that a dismissal was unfair, it can order reinstatement or compensation in appropriate circumstances.
For dismissals taking effect on or after 1 July 2026, the maximum compensation cap is $95,050. The actual compensation that may be ordered depends on the statutory calculation and can be lower.
However, compensation is not the only potential cost for a small business.
A workplace dispute can also involve:
- Time spent preparing documents and responding to the application
- Time spent participating in conciliation or other Fair Work Commission processes
- Legal or HR advisory fees, depending on the complexity of the matter
- Disruption to normal business operations
- Stress and management time associated with resolving the dispute
An employee who makes an unfair dismissal application must generally pay the applicable application fee, which is $92.70 for the 2026–27 financial year, unless a fee waiver or other applicable arrangement applies.
The Fair Work Commission may help parties resolve an unfair dismissal dispute through conciliation before the matter proceeds further. A well-documented and properly handled dismissal process can help an employer explain how and why the decision was made.
Common Mistakes Small Businesses Make
Several mistakes can make an otherwise legitimate dismissal more difficult to defend.
Relying Only on Verbal Warnings
A verbal conversation may be difficult to establish later if there is a dispute about what was said.
Where appropriate, follow up important discussions with written records, such as an email or formal warning, explaining the issue and what needs to change.
Firing Someone in the Heat of the Moment
Dismissing an employee during or immediately after a heated argument can create unnecessary risks.
Where circumstances allow, take time to establish what happened, consider the employee’s response, and document the relevant facts before making a final decision.
Miscounting Employees
Some business owners assume they qualify as a small business without carefully checking their employee numbers.
Regular and systematic casual employees and employees of associated entities may need to be considered when determining whether the business has fewer than 15 employees.
Skipping the Employee’s Opportunity to Respond
Even when an employer believes the reason for dismissal is clear, giving the employee a genuine opportunity to respond can be an important part of a fair process.
Failing to consider the employee’s response may create problems if the dismissal is later challenged.
Failing to Keep Records
Documentation can be extremely important if a dismissal is challenged.
Keep relevant records such as performance reviews, warnings, emails, meeting notes and termination documents in accordance with your workplace record-keeping obligations.
A Practical Step-by-Step Process to Follow
Before dismissing an employee, small business owners should consider the following process:
- Confirm your employee count. Check whether you genuinely qualify as a small business employer, including any employees who may need to be counted under the Fair Work rules.
- Check the employee’s length of service. Determine whether the employee has completed the required minimum employment period for an unfair dismissal claim.
- Identify the reason clearly. Establish whether the issue relates to conduct, performance, capacity, serious misconduct, or another reason.
- Review the evidence. Check relevant records, previous warnings, performance discussions, policies and other documents before making a decision.
- Give the employee an opportunity to respond. Where appropriate, explain the concern clearly and give the employee a reasonable chance to provide their side of the story.
- Consider whether improvement or further warnings are appropriate. For performance or ongoing conduct issues, make clear what needs to change and what may happen if it does not.
- Hold the dismissal meeting. If dismissal is the appropriate outcome, explain the decision clearly and calmly. Allow a support person where applicable.
- Confirm the decision in writing. Provide the employee with written confirmation of the termination and relevant information about final pay and entitlements.
- Keep relevant records. Retain the documents connected with the employment and dismissal in accordance with applicable workplace record-keeping requirements.
Following a proper process does not guarantee that an employee will not make a claim. However, careful documentation and compliance with the relevant requirements can help demonstrate how the dismissal decision was reached.
FAQs
Can I dismiss an employee without any warning in a small business?
In cases involving serious misconduct, immediate dismissal may be appropriate depending on the circumstances. For performance or less serious conduct issues, small business employers should generally follow the relevant process under the Small Business Fair Dismissal Code, including giving the employee an opportunity to respond and improve where appropriate.
Do casual employees count toward the 15-employee limit?
Casual employees who are employed on a regular and systematic basis may count toward the employee threshold. Casual employees who work irregularly or on an occasional basis may be treated differently when calculating the number of employees.
What happens if I lose an unfair dismissal case?
The Fair Work Commission may order reinstatement or compensation where appropriate. For dismissals taking effect on or after 1 July 2026, the compensation cap is $95,050, although the amount actually ordered may be lower. Other costs, such as legal or advisory fees and management time, are separate.
How long does an employee have to lodge an unfair dismissal claim?
An employee generally has 21 days from the date the dismissal takes effect to make an unfair dismissal application. The Fair Work Commission can extend the deadline in exceptional circumstances, but employees should not assume that a late application will automatically be accepted.
Does following the Small Business Fair Dismissal Code guarantee I’ll win a claim?
No process can guarantee a particular outcome. However, evidence showing that the Small Business Fair Dismissal Code was followed can be important if an unfair dismissal application is made. The Fair Work Commission considers the circumstances and evidence of the individual case.
Conclusion
Unfair dismissal law can feel complicated for small business owners, but having a clear process can make dismissals easier to manage.
The Small Business Fair Dismissal Code provides a framework for small business employers dealing with dismissal for conduct or performance reasons. By identifying the reason for dismissal, giving the employee a reasonable opportunity to respond, following the appropriate process, and keeping clear records, employers can reduce the risk of problems later.
The key is to treat dismissal as a process rather than a single conversation. Taking the time to handle each step carefully can help protect both your business and your employees.
Disclaimer: This article provides general information about unfair dismissal for small businesses in Australia. It is not legal advice. Workplace laws can vary depending on the circumstances, so businesses should obtain professional legal advice where appropriate.
