Maximum Compensation for Unfair Dismissal in Australia

If you’re running a small business or building a startup, terminations can be one of the hardest parts of the job.

On the one hand, you need a team that can perform, fit your culture, and help your business grow. On the other, ending someone’s employment can expose you to an unfair dismissal claim - and that’s where business owners often start asking the same question:

What is the maximum compensation for unfair dismissal in Australia, and how do we avoid paying it?

This guide breaks down what the maximum compensation for unfair dismissal actually means in practice, how the Fair Work Commission (FWC) approaches compensation, and the key risk areas where small businesses and startups can get caught out.

We’ll also cover practical steps you can take to reduce your exposure, without getting bogged down in legal jargon.

What Is The Maximum Compensation For Unfair Dismissal?

In Australia, unfair dismissal claims are usually made under the Fair Work Act 2009 (Cth) and determined by the Fair Work Commission (FWC).

However, it’s important to keep in mind that not every employee can make an unfair dismissal claim. Eligibility depends on factors like:

• whether the employee has completed the minimum employment period (generally 6 months, or 12 months for a “small business employer” with fewer than 15 employees),
• whether their earnings are below the high income threshold (unless they’re covered by an award or enterprise agreement), and
• whether the dismissal is excluded for other reasons (for example, some types of genuine redundancy situations).

If a dismissal is found to be “harsh, unjust or unreasonable”, the FWC can order a remedy. The two main remedies are:

• Reinstatement (the employee is put back into their job, often with back pay), or
• Compensation (a monetary payment instead of reinstatement).

For most employers, the headline risk to understand is the compensation cap - commonly referred to as the maximum compensation for unfair dismissal.

So What Is The Cap?

In broad terms, the maximum compensation that can be ordered for unfair dismissal is capped at the lower of:

• 26 weeks’ pay (i.e. 6 months of the employee’s remuneration), or
• Half the high income threshold (a figure that’s indexed and changes over time).

That means even if an employee claims they’ve suffered huge losses, the FWC generally can’t order compensation above the legislative cap.

Important note for employers: the cap is a maximum, not a default. Many unfair dismissal compensation outcomes are well below the cap, depending on the circumstances.

Compensation Isn’t The Only Risk

While the cap often gets the most attention, unfair dismissal disputes can still be costly because you’re usually dealing with:

• Management time and distraction (which is a big deal in a lean startup)
• Legal costs (even if you “win”)
• Settlement pressure
• Reputational impact (especially where workplace culture is a core part of your brand)

It’s also worth remembering: unfair dismissal is only one possible claim. In some cases, a termination can raise additional risks (like general protections claims), which don’t operate with the same compensation cap.

How Does The Fair Work Commission Calculate Unfair Dismissal Compensation?

Employers often expect compensation to work like a “penalty”. In reality, the FWC generally approaches compensation as a way to cover the employee’s financial loss flowing from the dismissal.

That means the calculation is usually centred around a question like:

How much pay did the employee likely lose because of this dismissal, and what should be adjusted based on the facts?

Factors That Commonly Influence The Amount

While every case turns on its own facts, the FWC may consider things like:

• How long the employee would likely have remained employed if they weren’t dismissed (this is often called the “anticipated period of employment”).
• The employee’s efforts to mitigate loss (e.g. looking for work, accepting reasonable alternatives).
• Any income earned after the dismissal (new job earnings can reduce compensation).
• Misconduct or performance issues that contributed to the situation (this can reduce compensation even if the dismissal was still unfair).
• Whether reinstatement is appropriate (if reinstatement is viable, compensation may be considered differently).

Compensation also generally isn’t intended to punish the employer. Instead, it’s meant to put the employee in the position they would likely have been in but for the unfair dismissal, within the limits of the legislation.

Does The FWC Include Things Like Stress Or Hurt Feelings?

Unfair dismissal compensation is generally not designed to cover “shock, distress or humiliation” as a separate category in the way some employers assume.

That said, the facts and conduct leading to dismissal still matter a lot. A poorly handled termination can increase the chance of an adverse finding and encourage an employee to pursue a higher settlement.

Are Legal Costs Included?

In the FWC, each side typically pays their own costs, and costs orders are not automatic.

From a business perspective, the practical reality is that even where compensation is ultimately low (or zero), the process can still be expensive if you’re responding late, gathering documents under pressure, or trying to fix avoidable process problems after the fact.

If you want tailored advice early, speaking with an Employment lawyer can help you map out the lowest-risk pathway based on your award coverage, documentation, and the real reason you’re considering termination.

When Are Small Businesses Most Exposed To Unfair Dismissal Claims?

Unfair dismissal risk is rarely just about whether you had a “good reason”. It’s often about process.

Small businesses and startups can be particularly exposed because:

• roles change quickly and expectations aren’t always documented
• managers are new to people leadership
• performance management is informal (“we’ve had a few chats”)
• there’s pressure to act fast when things aren’t working out

Small Business Employers: The Small Business Fair Dismissal Code

If you’re a “small business employer” (generally fewer than 15 employees, counted on a headcount basis), you may be able to rely on the Small Business Fair Dismissal Code.

In broad terms, the Code is designed to give small businesses a clearer framework for handling dismissals fairly. If you follow it, a dismissal may be considered fair for unfair dismissal purposes - but it still needs to be applied properly (including keeping appropriate records and ensuring procedural fairness steps are followed where required).

1. Terminating Without A Clear (And Provable) Reason

If the reason for termination is vague, inconsistent, or undocumented, you can end up in a “he said / she said” dispute.

This is where having a properly drafted Employment Contract (that clearly sets out duties, probation terms, and termination provisions) can make your position much clearer from day one.

2. Skipping Procedural Fairness

Procedural fairness generally means giving the employee:

• clear information about the concerns
• a genuine opportunity to respond
• a reasonable chance to improve (where appropriate)
• a fair decision-making process

In many unfair dismissal matters, employers lose not because they had no reason, but because they moved too quickly or didn’t document steps properly.

For example, issuing a properly structured show cause letter can be a practical way to formalise the concerns and give the employee a clear opportunity to respond before a final decision is made.

3. Mishandling Probation

Probation is often misunderstood in Australia.

Even if someone is on probation, you still need to handle termination carefully - and you should not assume “probation = no risk”. There may still be:

• notice obligations
• award requirements
• adverse action/general protections risks
• discrimination risks

It’s also important not to confuse probation with the minimum employment period. Even if your contract includes a probation period, unfair dismissal may still be available once the employee has passed the minimum employment period (generally 6 months, or 12 months for a small business employer).

If you’re unsure what’s safe during this phase, it’s worth reviewing how you manage termination during probation before you act.

4. Redundancy That Isn’t A “Genuine Redundancy”

Redundancy is another common trigger for unfair dismissal claims - particularly if the role still exists, or the consultation steps weren’t followed.

If you’re scaling down, restructuring, or changing your operating model, you want to be careful not to treat redundancy as a quick “exit strategy”.

Even where redundancy is legitimate, you’ll likely need to calculate entitlements correctly. A simple starting point is using a redundancy calculator as part of your planning (and then confirming the final numbers based on award/contract specifics).

Practical Steps To Reduce Your Risk (Without Overcomplicating Things)

The goal isn’t to make terminations “bulletproof” (there’s no such thing), but to build a fair and consistent approach that puts you in the strongest possible position if a claim is made.

1. Get The Foundations Right Early

If you’re moving fast, it’s tempting to hire quickly and “fix paperwork later”. The problem is that termination risk usually shows up months later - and by then, it’s hard to recreate what was agreed and why decisions were made.

As a baseline, you should aim to have:

• a clear employment contract for each team member
• position descriptions (even if brief)
• policies that match how you actually operate (especially around conduct, performance, and confidentiality)

These documents don’t just help with disputes. They help your managers lead consistently and reduce confusion across the team.

2. Use A Consistent Performance Management Process

Many unfair dismissal disputes arise from “surprise terminations”, where the employee says they didn’t know their job was at risk.

A practical process usually includes:

• setting measurable expectations
• documenting performance conversations
• providing reasonable time to improve
• tracking outcomes and follow-up meetings

Even a simple, consistent framework can reduce your risk significantly, especially if you can show you gave the employee a genuine chance to improve.

In higher-risk or more complex matters, a structured performance management process can help you handle performance issues in a way that is fair and defensible.

3. Be Careful With Notice And Final Pay

Unfair dismissal claims often sit alongside arguments about notice, pay, or entitlements.

If you terminate someone and they claim you didn’t provide correct notice, you can end up dealing with multiple issues at once - which makes disputes harder to resolve quickly.

Depending on the circumstances, you might consider payment in lieu of notice (where you pay out the notice period instead of having the employee work it).

This can be useful where keeping the employee in the workplace during the notice period would create operational, confidentiality, or safety risks - but it needs to be handled correctly under the employment contract, award, and the Fair Work Act.

4. Don’t Underestimate The Cost Of Non-Compliance

If a termination is handled poorly and also breaches workplace laws (for example, underpaying, failing to provide required entitlements, or ignoring award requirements), the financial impact can extend beyond the unfair dismissal cap.

It’s also important to be aware that workplace regulators can issue enforcement action and penalties in some circumstances. Understanding the landscape of Fair Work Act penalties helps you appreciate why “quick fixes” can become expensive later.

5. Keep Records (Because Memory Isn’t Evidence)

If you ever need to respond to a claim, strong records can be the difference between a quick resolution and a drawn-out dispute.

Examples of useful records include:

• written performance feedback
• meeting notes (dated, with attendees listed)
• KPIs and performance metrics
• warnings and improvement plans
• emails summarising key discussions

You don’t need a huge HR department to do this well. You just need a consistent habit of documenting key events.

How To Think About Settlement Vs Fighting A Claim

When an unfair dismissal claim comes in, many business owners want to know: should we settle, or defend it?

There’s no one-size-fits-all answer, but a practical way to think about it is to weigh:

• Merits: Do you have a valid reason and a fair process?
• Documentation: Can you prove what happened?
• Commercial impact: What will it cost in time, distraction, and legal spend?
• Precedent/culture: What message does it send internally if you settle quickly?
• Risk beyond unfair dismissal: Are there other potential claims in the background?

For startups, the “hidden cost” is often founder time. Even if the maximum compensation for unfair dismissal is capped, the operational distraction of defending a claim can still be significant.

This is where getting advice early can help you decide on a strategy that suits your risk tolerance and growth stage - whether that’s settlement, mediation, or defending the matter on principle.

Key Takeaways

• The maximum compensation for unfair dismissal is capped, usually at the lower of 26 weeks’ pay or half the high income threshold (as indexed).
• Whether an employee can bring an unfair dismissal claim depends on eligibility requirements like the minimum employment period, and (in many cases) award/enterprise agreement coverage or earnings relative to the high income threshold.
• The Fair Work Commission typically calculates compensation by looking at likely lost earnings and adjusting for factors like mitigation and misconduct.
• Small businesses and startups are often most exposed when terminations are rushed, poorly documented, or lack procedural fairness - and small business employers may also need to consider the Small Business Fair Dismissal Code.
• Strong foundations - clear contracts, consistent performance management, and good records - can significantly reduce unfair dismissal risk.
• Even where the compensation cap applies, the broader cost of disputes (time, stress, settlement pressure) can be significant for lean teams.

Important: This article is general information only and isn’t legal advice. Because the right approach depends on the facts (including award coverage, business size, and the reason for dismissal), consider getting tailored advice before you act.

If you’d like a consultation on managing terminations, reducing unfair dismissal risk, or putting the right employment documents in place, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.