Unfair Dismissal For Small Businesses In Australia: A Guide Under The Fair Dismissal Code

Dismissing an employee is never easy - and if you’re a small business owner, you’re probably juggling compliance worries on top of everything else.

The good news is that small businesses have a tailored framework to follow. The Small Business Fair Dismissal Code sets out when and how you can lawfully dismiss an employee, and what a “fair process” looks like in practice.

In this guide, we’ll unpack the Code in plain English, explain where small businesses commonly trip up, and share practical steps to reduce the risk of an unfair dismissal claim. With the right process and documents, you can make tough decisions confidently and lawfully.

What Is The Small Business Fair Dismissal Code?

The Small Business Fair Dismissal Code is a set of rules under the Fair Work framework that applies to businesses with fewer than 15 employees (headcount, not full-time equivalents).

If you genuinely follow the Code when dismissing an employee, the dismissal should be considered fair for the purposes of unfair dismissal laws. This doesn’t give you a free pass - it gives you a clear, practical pathway to a fair termination.

Who Is Covered - And Who Isn’t?

• Employee count: The Code applies if you have fewer than 15 employees at the time of dismissal (including casuals employed on a regular and systematic basis).
• Minimum employment period: Employees cannot bring an unfair dismissal claim unless they’ve served the minimum employment period (generally 12 months for small businesses).
• Contractors: The Code does not apply to genuine independent contractors.

Even when a worker isn’t eligible for unfair dismissal, other risks can still apply (for example, general protections or discrimination). It’s still important to follow a fair, documented process.

How Does The Code Interact With “Harsh, Unjust Or Unreasonable”?

When the Fair Work Commission assesses an unfair dismissal claim, it looks at whether the dismissal was “harsh, unjust or unreasonable” under section 387 of the Fair Work Act. If you’ve complied with the Code, you’re in a much stronger position to show the dismissal wasn’t unfair.

When Can A Small Business Dismiss Fairly Under The Code?

The Code recognises two broad scenarios: summary dismissal for serious misconduct, and dismissal with notice (or payment in lieu) for performance or conduct concerns that aren’t serious misconduct.

Summary Dismissal For Serious Misconduct

You can terminate immediately if you reasonably believe the employee engaged in serious misconduct, such as theft, fraud, violence, or serious breaches of work health and safety.

“Reasonably believe” means you had a rational basis for your decision based on what you knew at the time. It helps to promptly investigate, keep notes, and give the employee a chance to respond if circumstances allow (even brief discussions can be valuable evidence that you acted fairly).

If you need time to investigate, consider whether it’s appropriate to stand the employee down on pay while you make inquiries. Our guide on standing down an employee pending investigation sets out when this is a lawful option.

Dismissal With Notice For Performance Or Conduct

For underperformance or less serious conduct issues, the Code expects you to give the employee:

• Clear warnings (preferably in writing) about the issue and the risk of dismissal if it continues;
• A reasonable opportunity to improve (with guidance, training or support); and
• An opportunity to have a support person present at any significant meeting, if they request it.

If you decide to end employment, you must provide the required notice or make a lawful payment in lieu of notice, plus any accrued entitlements.

Redundancy Vs Dismissal For Cause

Sometimes a role genuinely disappears (for example, due to a restructure or downturn). That’s a redundancy - not a performance or conduct dismissal. To rely on redundancy, the job itself can’t be done by anyone anymore, and you should consult the employee if an award or agreement requires it. A fair redundancy is generally not “unfair dismissal”, but if it’s not genuine, the risks are high.

What About Probation?

Probation doesn’t mean “no process.” While the minimum employment period typically prevents an unfair dismissal claim, you should still act fairly and document your reasons for ending employment during probation. Other claims (like discrimination) can apply from day one, so keep your process professional.

What Does A Fair Process Look Like Under The Code?

The Code is practical. It tells you to communicate clearly, give warnings (except for serious misconduct), and keep records. Here’s a step-by-step approach that aligns with the Code.

1) Identify The Issue And Gather Facts

Be specific about the concern (e.g. missing deadlines, customer complaints, lateness, policy breaches). Collect emails, timesheets, witness notes and relevant policies. A short, prompt investigation helps ensure you’ve got the full picture.

2) Invite The Employee To A Meeting

Explain the concern, share examples, and let them know they can bring a support person if they want to. If allegations are serious, consider sending a written invite with the key details and evidence you’ll discuss.

3) Issue A Clear Warning And Set Expectations

For ongoing performance or conduct concerns, provide a written warning that:

• Explains the issue and impact;
• Sets measurable expectations and a timeframe to improve;
• Offers support (training, mentoring, regular check-ins); and
• States that failure to improve may lead to dismissal.

In some cases, a formal show cause letter is appropriate - it invites the employee to respond to proposed disciplinary action before a final decision is made.

4) Review Progress And Consider The Response

Check in during the improvement period. If the employee raises a reasonable explanation or mitigation, consider it. Document these conversations and any support provided.

5) Decide - And Communicate Clearly

If there’s been no sufficient improvement (or serious misconduct is substantiated), decide on the outcome. If dismissal is appropriate, confirm in writing, set out the effective date, and provide notice or payment in lieu, along with details of final pay and the return of company property.

6) Keep Records

Good records are your best protection. Save copies of warnings, meeting invites, notes, evidence reviewed, and the termination letter. This documentation demonstrates that you followed a fair process under the Code.

Common Risk Areas (And How To Avoid Them)

Even well-intentioned employers can stumble. These are the issues we see most often - along with practical fixes.

Not Warning The Employee (When A Warning Is Required)

Outside of serious misconduct, the Code expects a clear warning and a chance to improve. If you skip this step, the dismissal is vulnerable.

Fix: Provide a written warning, set clear expectations and a timeframe, and offer reasonable support.

Unclear Or Inconsistent Evidence

If you can’t back up your reasons, it’s harder to show the decision was fair.

Fix: Keep notes and collect documents contemporaneously. If needed, place the employee on paid suspension while you investigate, consistent with your policies and the guidance on standing down pending investigation.

Mixing Up Redundancy And Performance

Restructures and cost-cutting happen, but calling a performance or conduct issue “redundancy” can be risky if the role still exists.

Fix: Use the correct pathway. If it’s genuinely a redundancy, follow consultation requirements and ensure the role is no longer required to be performed by anyone.

Ignoring A Support Person Request

You don’t have to provide a support person, but you shouldn’t unreasonably refuse a request to have one present at a critical meeting.

Fix: Make it clear in your invite that a support person is welcome if the employee wants one.

Problematic Contracts And Policies

Unclear or outdated documents make it harder to manage performance and conduct fairly.

Fix: Ensure every team member has a current Employment Contract and that your workplace rules are captured in a practical Workplace Policy or staff handbook. Align your process with your documents.

Notice And Final Pay Errors

Missteps on notice, payment in lieu, or accrued entitlements can undermine an otherwise fair process.

Fix: Double-check notice periods and whether payment in lieu of notice is appropriate. Pay out any accrued annual leave and other entitlements as required.

Documents And Policies Small Businesses Should Prepare

A strong paper trail helps you manage issues early - and proves you acted fairly if a dispute arises. Consider these essentials.

• Employment Contract: Sets out duties, hours, pay, notice, policies and key expectations tailored to each role.
• Workplace Policy: A clear set of rules (conduct, performance management, leave, IT, WHS) that you can rely on when issues arise.
• Show Cause Letter: A template process to notify an employee of issues and invite a response before deciding on disciplinary action.
• Suspension/Stand Down Guidance: Procedures for paid suspension while investigating serious allegations.
• Probation Process Guide: Steps and timelines to fairly assess fit during the probation period.
• Payment In Lieu Of Notice: Rules for replacing notice with a lawful payment, and how to calculate it.

If you’re looking for a ready-to-use pack that aligns with the Code, Sprintlaw’s Employee Termination Documents Suite can save time and reduce risk by standardising your letters and checklists.

Practical Tips To Apply The Code (And Protect Your Business)

• Act promptly but fairly: Deal with issues as soon as they arise. Delay can make problems worse and look unfair.
• Be specific: Vague warnings aren’t helpful. Use clear examples, measurable targets, and timeframes.
• Offer reasonable support: Training, mentoring and regular feedback can turn performance around - and shows you acted reasonably if dismissal becomes necessary.
• Tailor the process to the issue: Serious misconduct requires immediate, careful handling. Performance issues usually need warnings and an improvement plan.
• Document everything: Keep notes of meetings, warnings, improvement plans, and decisions. Good records win disputes.
• Sense-check your decision: Before you dismiss, ask: “Would this look fair and reasonable to an independent decision-maker?” If you’re unsure, get advice.

Key Takeaways

• The Small Business Fair Dismissal Code gives employers with fewer than 15 employees a clear pathway to a fair termination, but you must actively follow it.
• Summary dismissal is only for serious misconduct; otherwise, provide warnings, an opportunity to improve, and don’t unreasonably refuse a support person.
• Keep a strong paper trail - written warnings, meeting notes, investigation records, and a clear termination letter are essential.
• Get the basics right: current Employment Contract, practical Workplace Policy, and clean processes for probation, investigations and payment in lieu of notice.
• Redundancy and performance dismissals follow different rules - use the correct pathway and document your reasoning.
• If you’re unsure your situation meets the Code, a short chat with a lawyer now can prevent a costly dispute later.

If you’d like a consultation on unfair dismissal and the Small Business Fair Dismissal Code, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.