How to Dismiss an Employee Fairly in NSW: Avoiding Unfair Dismissal

An employer can have an entirely valid reason to dismiss an employee and still be found to have dismissed them unfairly. This is the single most misunderstood feature of Australian employment law, and it is the reason a large share of unfair dismissal claims succeed or settle. The Fair Work Commission assesses not only whether there was a good reason to dismiss, but whether the dismissal was carried out fairly. A sound reason executed through a flawed process is, in law, often an unfair dismissal.

This article sets out how to lawfully end an employment relationship in NSW, the eligibility rules, the requirements for a valid reason and a fair process, the special rules for redundancy and small businesses, and the economic cost of getting it wrong.

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The economic cost of a mishandled dismissal

In the current labour market and cost environment, a mishandled termination is an epxensive event. The remedies and costs can include compensation of up to six months’ pay for a successful unfair dismissal claim; uncapped compensation, including for non-economic loss, in a general protections claim; reinstatement, in some cases, of an employee the business no longer wishes to employ; legal and representation costs; and the indirect cost of management time and lost focus during a dispute that can run for months. For a small business, a single contested dismissal can cost more than the employee’s annual salary.

Step 1: is the employee eligible to claim?

Not every employee can bring an unfair dismissal claim. The principal gateways are:

Minimum employment period. An employee must generally have completed a minimum period of continuous service, 12 months for a small business (fewer than 15 employees), and 6 months otherwise, before they can claim unfair dismissal.
High income threshold. An award-free and agreement-free employee earning above the high income threshold is generally excluded from unfair dismissal.
Time limit. An application must be lodged within 21 days of the dismissal taking effect.

Critically, these limits apply to unfair dismissal only. A general protections claim, alleging that the dismissal was for a prohibited reason such as exercising a workplace right, a discriminatory attribute, or making a complaint, has no minimum employment period and applies from the first day of employment. This is why probation provides far less protection than employers assume.

Step 2: a valid reason

A lawful dismissal requires a valid reason connected to the employee’s capacity or conduct, or to the genuine operational requirements of the business. Valid reasons typically fall into three categories: poor performance (properly documented and communicated), misconduct (substantiated, not assumed), and genuine redundancy. The reason must be sound and defensible on the evidence. A personality clash, an unverified complaint, or a reason invented after the decision will not survive scrutiny.

Step 3: procedural fairness

Even with a valid reason, the process must be fair. The elements the Commission examines include whether the employee was notified of the reason for the dismissal; whether they were given a genuine opportunity to respond before the decision was made; whether they were allowed a support person in any discussion relating to dismissal; and, where the issue is performance, whether they were warned about the unsatisfactory performance and given a chance to improve. Procedural fairness is not a formality. It is frequently the issue on which a claim turns.

Step 4: the Small Business Fair Dismissal Code

A business with fewer than 15 employees that follows the Small Business Fair Dismissal Code has a complete defence to an unfair dismissal claim. The Code sets out a simpler process for summary dismissal (for serious misconduct) and for other dismissals (requiring a warning, a reason, and an opportunity to respond). The defence is only available if the Code was actually followed and the employer can produce evidence of compliance, which makes contemporaneous documentation essential.

Step 5: genuine redundancy

Redundancy is a valid reason for dismissal, but only if it is genuine. A genuine redundancy requires that the role (not the person) is no longer required due to operational change; that any consultation obligations in the applicable award or agreement have been met; and that redeployment within the business or an associated entity has been genuinely considered. A redundancy that targets a person rather than a role, skips required consultation, or ignores a redeployment opportunity can be challenged as an unfair dismissal. Redundancy pay obligations under the National Employment Standards may also apply depending on the employee’s length of service and the size of the business.

The probation misconception

Many employers treat a probation period as a window in which an employee can be dismissed without consequence. This is only partly true. A probation period can be structured so that the employee has not yet completed the minimum employment period for an unfair dismissal claim. But it provides no protection against a general protections claim, which applies from day one and carries uncapped compensation, nor against a discrimination claim. Dismissing a probationary employee for an unlawful reason, because they raised a safety concern, took personal leave, or made a complaint, is just as actionable as dismissing a long-serving one.

Need To Let An Employee Go? Handle It Properly

Reduce The Risk Of Unfair Dismissal And General Protections Claims

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Even with a valid reason, a rushed or poorly documented dismissal can expose your business to claims. CMI Legal can help you manage performance, redundancy, termination, and dismissal processes lawfully.

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Common mistakes

Dismissing on a valid reason but through a rushed, undocumented process.
Failing to warn and give a chance to improve in performance cases.
Treating probation as immunity from all claims.
Dressing up a performance dismissal as a redundancy to avoid a process, which creates exposure on both fronts.
Failing to keep contemporaneous records, leaving the employer unable to prove what actually happened.

The off-ramp: build the file before the decision

A defensible dismissal is assembled before it happens, not justified afterwards. That means documenting performance concerns as they arise, conducting and recording fair process steps, taking advice before acting in any contested or borderline case, and ensuring the reason and the process can both withstand examination. The cost of advice before a dismissal is a fraction of the cost of defending a claim after one.

CMI Legal advises Sydney employers on terminations, performance management, redundancy, and the defence of unfair dismissal and general protections claims. Book a free 15-minute consultation before your next difficult conversation.

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How to Dismiss an Employee Fairly in NSW: Avoiding Unfair Dismissal

The economic cost of a mishandled dismissal