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How to Terminate an Employment Contract

Reading time: 9 mins

An employer can terminate an employment contract by following the contract and the law. Employers must read the contract, identify the right to terminate and follow the process set out in the contract.

Employers need to carefully manage the termination of an employment contract in Australia.

Businesses can face several legal challenges if they do not handle things the right way. Additionally, employees have simple and affordable ways to address any concerns if they believe their employment was terminated unlawfully.

This article explains how to terminate an employment agreement.

How to terminate an employment contract

This article will take you through the steps that should be taken to terminate an employment agreement.

  • The process to terminate an employment contract
  • What laws should you consider when terminating an employment contract?
  • Your employee is in their probation period and it’s not working out
  • Our employee is not performing to the standard you require them
  • Your employee has engaged in some kind of conduct that brings your business into disrepute
  • Your employee has stolen from you or a customer

The process to terminate an employment contract

An employer must read the employment contract before taking any steps to terminate an employee. Employers must determine if and how they can terminate the contract. Further, you must read any policies referred to in the contract.

Carlynn is a Senior Paralegal at Prosper Law and is finishing a JD in Law in the Philippines

What laws should you consider when terminating an employment contract?

Here’s a basic run-down of the legal framework in Australia: employment is (for the most part) governed by the Fair Work Act 2009 (Cth) and the Fair Work Regulations 2009 (Cth).

These laws set out the minimum national employment standards. In addition, Modern Awards also cover certain groups of employees (for instance, administrative staff, architects, retail and tradespeople).

These Modern Awards set out the minimum standards for those groups of employees. Case law explains how laws and Modern Awards are used in specific situations. Case law also deals with issues that are not specifically addressed by these laws.

Your employee is in their probation period and it’s not working out

This one can be easy, so long as your probation period is not longer than six months. If your employee has been employed for at least six months (yes – one day makes a difference so be careful!), they have the benefit of unfair dismissal protections in the Fair Work Act 2009 (Cth).

Employees don’t have the benefit of unfair dismissal protection if they have been employed for less than six months.

However, they may still bring a claim for adverse action. This can happen when the employee alleges that their employment has been terminated based on a discriminatory reason. For instance, the employee made a workplace complaint or is pregnant).

The problem with a claim for adverse action versus unfair dismissal is that the amount able to be claimed for unfair dismissal is limited. Employers can only be liable for damages for unfair dismissal up to an amount equivalent to six months’ pay. On the other hand, there is no limit on damages for adverse action.

Your employee is not performing to the standard you require them to

Employers must carefully manage underperformance. The employee must be “performance managed”. This means employers must:

  • provide specific examples of poor performance
  • provide specific guidance on ways the employee can improve and meet your requirements
  • allow the employee to respond and enable a reasonable period for the employee to improve.

If the carefully mapped out process fails, then you can consider moving forward with employment termination.

Your employee has engaged in some kind of conduct that brings your business into disrepute

This may depend on the degree to which the conduct brings your business into disrepute and what policies your business has in place. If the conduct is bad enough (and you have an appropriately worded employment contract and policies), you may be able to summarily dismiss your employee.

This may also mean that you do not have to pay any notice period to your employee.

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Your employee has acted inappropriately towards another staff member

Hopefully, your business has policies in place which deal with how your staff are meant to behave towards one another and your business actively enforces and supports those policies.

If your business does have appropriate policies in place, and depending on the conduct of the employee, you may be able to summarily dismiss your employee.

As set out above, this may also mean that you do not have to pay any notice period to your employee.

Your employee has stolen from you or a customer

You must be able to prove that your employee has stolen. And you must prove this on the balance of probabilities. This is because the civil standard of proof applies to the termination of an employment contract. If you can, you may choose to summarily dismiss your employee, report the matter to the police and pursue your employee for recovery.

It should be noted that employers cannot deduct any amounts from final payments owing to their employees. This is the case even if the value of the stolen item is more or less than the payment owed. You must pay all outstanding entitlements, and then pursue your employee separately.

When employers don’t have any work

There are options if employers don’t have work for the employee to do or that role can be absorbed by one or more of your other employees.

Here’s where redundancy comes in. It’s important to note that redundancy doesn’t just come about because a person’s role is no longer required to be performed by that person. But, it can also come about because you don’t require that role to be performed by that specific employee because the duties can be absorbed by one or more of your other employees.

With redundancy, however, you need to be careful. An employee could argue that they were unfairly dismissed. For instance, where an employer doesn’t follow the consultation requirements. That is, the requirements in the Fair Work Act 2009 (Cth) and any applicable Modern Award

Frequently asked questions

What are the necessary steps for an employer to terminate an employee's contract in Australia?

Employers must follow a fair process when terminating an employment contract. This will typically include providing written notice and discussions with the employee about the reasons for termination. It may also involve offering support or counselling where appropriate, and allowing the employee to respond to any allegations.

Answer: Yes, the Fair Work Act 2009 outlines minimum notice periods based on an employee’s length of service. For example, employees who have been employed for less than one year are entitled to at least one week’s notice, while those employed for more than five years require four weeks’ notice.

Yes, employers can provide payment in lieu of notice, but it should be equal to the amount the employee would have earned during the notice period. Both parties must agree on this or this should be allowed by the employment contract.

A termination meeting is a discussion between the employer and the employee to communicate the decision to terminate employment. It should be conducted privately and respectfully, providing clear reasons for termination and allowing the employee to ask questions or respond.

Yes, Australian employment law distinguishes between different reasons for termination. For example, redundancy requires a valid operational reason. On the other hand, termination for misconduct should follow a fair and documented process, ensuring the employee has an opportunity to respond to allegations.

About the Author

Farrah Motley
Director of Prosper Law. Farrah founded Prosper online law firm in 2021. She wanted to create a better way of doing legal work and a better experience for customers of legal services.

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