Hiring your first employee is one of the most significant legal milestones a small business will reach. It changes your obligations under federal and state law, your insurance requirements, your tax position, and your personal exposure as a director.
Most business owners do not get this wrong because they are careless. They get it wrong because the legal framework around employment is large, fragmented across multiple agencies, and rarely explained in plain English. The economic consequence of getting it wrong has grown: with margins compressed and Fair Work enforcement activity rising, the cost of a misclassified employee or an unpaid entitlement is higher now than it has been for years.
This guide sets out what NSW small business owners need to do before, on, and after their first employee’s start date. It is a practical overview, not legal advice. Speak to a lawyer before signing any employment contract.
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Employment is the area of highest regulatory exposure for a growing small business. Three features of the current framework explain why. Modern Award underpayments are recoverable for up to six years, meaning a small classification error compounds into a substantial liability before it is discovered. Unpaid superannuation can be pursued by the ATO and, through a director penalty notice, can become the director’s personal liability. And underpayment of wages is now, in certain circumstances, a criminal offence under federal law. For a business operating on a 5 to 10% net margin, a single sustained underpayment can erase a year’s profit.
Three things matter before you put a number on the table.
Employee or contractor? Calling someone a contractor does not make them one. Under the Fair Work Act as amended by the Closing Loopholes legislation, Fair Work and the ATO look at the totality of the working relationship, not just the written contract, when deciding whether someone is genuinely a contractor. Misclassification exposes you to unpaid superannuation, PAYG, leave entitlements, and underpaid wages, recoverable for up to six years.
Which Modern Award applies? Modern Awards apply automatically based on your industry and the role being performed. You cannot opt out. The wrong award, or no award, is the single most common cause of underpayment claims in Australia.
What category of employee? Permanent (full-time or part-time), casual, or fixed-term. Each carries different rules around notice, leave, termination, and conversion rights. The statutory definition of casual employment was tightened in 2024. An employee with a firm advance commitment to ongoing work is no longer casual, regardless of what the contract says.
A handshake is not enough. A template downloaded years ago is rarely enough. At a minimum, a proper contract should cover position and duties, start date, hours and location, the applicable Modern Award, remuneration and how superannuation is treated, probation period, leave entitlements, confidentiality and intellectual property ownership, restraint of trade where appropriate, notice of termination, and reference to workplace policies.
Two clauses warrant special attention. A well-drafted set-off clause allows above-award salary to offset award entitlements such as overtime and allowances. Without one, you may be liable for both. Restraint clauses must be reasonable in scope, duration, and geography to be enforceable; boilerplate restraints are routinely struck down by the courts.
By the time your employee walks in, you must have:
Before making your first hire, make sure your contracts, award classification, superannuation obligations, and workplace documents are properly prepared. CMI Legal can help you start employment on the right legal footing.
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If things do not work out, the rules depend on how long the employee has been with you and the size of your business. For a small business with fewer than 15 employees, an employee must complete 12 months of continuous service before they can bring an unfair dismissal claim. For larger businesses, the qualifying period is six months. However, general protections claims can be brought from day one of employment, have no qualifying period, and carry uncapped damages. Notice of termination is set by the contract or the National Employment Standards, whichever is greater.
The cost of getting a first hire wrong is not the contract dispute. It is the back-pay, the unpaid super, the Fair Work order, the loss of focus during a critical growth period, and the reputational hit that can follow a public ruling. The cost of getting it right is comparatively small: a properly drafted contract, the right award classification, a clear policy document, and a short legal review before the offer goes out.
CMI Legal advises Sydney small businesses on employment contracts, Modern Award compliance, and managing the transition to becoming an employer. Book a free 15-minute consultation to have your hiring documents reviewed before your next offer goes out.
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