Unlawful Termination vs Unfair Dismissal in Australia

Ending someone’s employment is one of the toughest parts of running a business. On top of the human side, there’s legal risk - and the terms “unlawful termination” and “unfair dismissal” often get used interchangeably, even though they’re different under Australian law.

If you get the distinction wrong, you could face the wrong kind of claim, miss a key defence, or end up in a more costly dispute than necessary.

In this guide, we break down the difference between unlawful termination and unfair dismissal from an employer’s perspective, when each risk applies, and how to set up a fair, compliant termination process that protects your business.

What’s The Difference Between Unlawful Termination And Unfair Dismissal?

These two concepts live in different parts of the Fair Work regime and carry different tests, timeframes and remedies. Understanding them helps you plan a termination the right way and assess your risk if an employee raises a dispute.

Unfair Dismissal (Harsh, Unjust or Unreasonable)

• What it is: An employee claims their dismissal was “harsh, unjust or unreasonable” - for example, because there was no valid reason, process was flawed, or the outcome was disproportionate.
• Key law: Fair Work Act 2009 (Cth) - unfair dismissal provisions.
• Who can apply: Generally, national system employees who have completed the minimum employment period (6 months for larger employers; 12 months if you’re a small business).
• Time limit: Usually 21 days from the dismissal taking effect.
• Remedies: Reinstatement or compensation (capped, commonly at up to 26 weeks’ pay), not penalties.
• Small Business Code: Small employers can rely on the Small Business Fair Dismissal Code if they followed it.

Unlawful Termination (Prohibited Grounds) and General Protections

• What it is: Dismissing someone for a prohibited reason (e.g. discrimination, temporary absence due to illness, pregnancy/parental leave) or because they exercised a “workplace right” (e.g. made a complaint, took sick leave, engaged in industrial activity). In practice, most modern claims run as “general protections - dismissal” claims.
• Key law: Fair Work Act 2009 (Cth) - general protections; unlawful termination (for non-national system employees).
• Who can apply: Broad coverage across employees, with some rules for contractors and prospective employees in adverse action claims.
• Burden of proof: Reverse onus - once an allegation is raised, the employer must show the prohibited reason was not a reason for the dismissal.
• Remedies: Compensation and civil penalties; reinstatement is also possible. There is no compensation cap as in unfair dismissal.

In short: unfair dismissal is about the fairness of your reason and process; unlawful termination/general protections is about the reason (and whether it included any prohibited motive). It’s common for employees to file one type of claim initially, then pivot - so plan for both when managing risk.

When Do These Laws Apply To Small Businesses?

Small businesses (fewer than 15 employees) have some specific rules - but it’s a myth that small employers are “exempt” from dismissal laws entirely.

Minimum Employment Period

For unfair dismissal, an employee must complete the minimum employment period before they’re eligible to apply. For a small business, that’s 12 months of continuous service. If they haven’t met that threshold, they generally can’t file an unfair dismissal claim - but they can still bring a general protections (unlawful termination) claim, which has no minimum service threshold.

Small Business Fair Dismissal Code

If you’re a small business, following the Code can be a complete defence to an unfair dismissal claim. It asks you to have a valid reason related to capacity or conduct, give the employee a chance to respond, and warn them if performance is the issue (except for serious misconduct). Keep records of the steps you took.

Probation Periods

Probation helps test suitability, but it doesn’t remove your legal obligations. You still need a fair reason, a sensible process and to avoid prohibited reasons for dismissal. For a deeper look at this, see termination during probation in our probation guide.

Risks, Remedies And Costs If A Claim Is Made

Thinking ahead about remedies helps you weigh options and negotiate sensibly if a dispute arises.

• Unfair dismissal exposure: Reinstatement (with continuity and back pay) or compensation up to a statutory cap. You’ll also have legal costs, management time, and potential PR issues.
• General protections exposure: Compensation for loss, injury or distress; civil penalties; potential reinstatement. The reverse onus makes documentation of your genuine reasons critical.
• Contract/award breaches: Separate risks for notice, redundancy, and consultation breaches (e.g. award obligations). These can attract penalties and underpayment claims.
• Insurance and relationships: Disputes affect morale and brand. A structured process and sound paperwork can help resolve matters early, sometimes using an Employee Separation Agreement to settle claims and move forward.

How To Run A Fair And Lawful Termination Process

Process matters. Even with a valid reason, a poor process can turn a manageable exit into a legal headache. Here’s a practical, employer-friendly roadmap you can adapt to your business.

1) Confirm The Genuine Reason

Be clear on your real reason for dismissal and document it. Common categories include:

• Capacity or performance: The employee cannot do the job to the required standard despite support.
• Conduct: Serious misconduct (e.g. theft, violence) or repeated misconduct.
• Genuine redundancy: The role is no longer required for operational reasons and you’ve consulted where required.

Sanity-check your reason to ensure it doesn’t overlap with a prohibited ground (e.g. pregnancy, illness, complaint about safety). If it does, stop and seek advice.

2) Gather Evidence And Keep Records

Collect performance notes, KPIs, emails, witness statements and policy references. Consistent records and earlier steps like warnings carry weight. A well-drafted Employment Contract and clear workplace policies reinforce your position and expectations.

3) Investigate Before You Decide (For Conduct Issues)

If the issue is misconduct, run a fair investigation. That usually means putting allegations to the employee, allowing a response, and considering evidence objectively. If risks are high, you can consider standing the employee down pending investigation (subject to contract, policy or applicable industrial instrument).

4) Use A Proper Show Cause Step

Before making a final decision, invite the employee to explain why termination shouldn’t occur. A clear, well-structured notice helps - see our guide to show cause letters for what to include.

5) Consider Alternatives And Proportionality

Ask whether a warning, training, redeployment or final performance plan could fix things. For redundancy, confirm there’s genuinely no need for the role and consider reasonable redeployment options. Proportional decision-making reduces unfairness risk.

6) Decide And Communicate

Make the decision, prepare a dismissal letter and explain the reasons (briefly and factually) in a meeting. Offer a support person if appropriate. Confirm the effective date, notice or payment in lieu of notice, and how property/access will be handled.

7) Settle Where Appropriate

Sometimes, both sides want closure and certainty. A without-prejudice discussion followed by a tailored Deed of Release can document a settlement, waive claims, and protect confidentiality. Structure any ex gratia payment carefully and ensure statutory entitlements are paid.

8) Document The File

File notes, emails and meeting records can be decisive in a dispute - especially in general protections matters where you carry the onus to disprove a prohibited reason.

Paying Final Entitlements The Right Way

Getting the numbers wrong creates unnecessary disputes. Plan these items before the termination meeting so you can explain what the employee will receive and when.

• Notice or pay in lieu: Provide the correct notice under the Fair Work Act, an applicable award/enterprise agreement or contract. If paying in lieu, confirm the calculation and include loadings or allowances as required. Our guide to payment in lieu covers the essentials.
• Accrued leave: Pay out any accrued but untaken annual leave (and leave loading if applicable). Long service leave depends on State/Territory law.
• Redundancy pay: If it’s a genuine redundancy, consider redundancy pay obligations and any exceptions (e.g. small business redundancy exceptions). Make sure you meet any award consultation requirements.
• Deductions and set-offs: Only make lawful deductions (e.g. authorised in writing or permitted by law/award). Be careful with “set-off” clauses and ensure they are valid and applied correctly.
• Superannuation on termination amounts: Super is payable on ordinary time earnings, but not typically on some termination components. Confirm with payroll before processing.
• Timing and payslips: Some instruments require payment within a set timeframe. Provide a breakdown so the employee understands their final pay. For a broader overview, see our final pay guide.

Key Takeaways

• Unfair dismissal focuses on whether the dismissal was harsh, unjust or unreasonable; unlawful termination/general protections focuses on whether a prohibited reason (like discrimination or a workplace right) was a reason for dismissal.
• Small businesses benefit from the Small Business Fair Dismissal Code and a longer minimum employment period for unfair dismissal, but general protections risks still apply from day one.
• The safest approach is to combine a valid reason with a fair process: investigate, give a chance to respond, consider alternatives, and document each step.
• For conduct matters, build a defensible record with investigations, lawful stand down where appropriate, and a proper show cause invitation before deciding.
• Pay final entitlements accurately - including notice or payment in lieu, leave balances and any redundancy pay - to avoid avoidable disputes.
• If a dispute arises, consider early resolution using an Employee Separation Agreement documented in a Deed of Release for certainty and closure.
• Strong foundations - a clear Employment Contract and consistent policies - make performance management and, if necessary, termination far more defensible.
• Probation doesn’t remove your obligations; follow a fair process and watch for prohibited reasons - see our probation guide for nuance.

If you’d like a consultation about managing unfair dismissal vs unlawful termination risks in your business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.