Terminating an employment contract in Australia is a process that requires careful adherence to both the law and the employment agreement.
Employers must follow the correct steps to avoid unfair dismissal claims, adverse action, or costly disputes.
In this article, our employment contract lawyer, explains the legal grounds, common reasons, and best practices for terminating an employment contract.
Key takeaways
Review the employment contract and workplace policies before termination.
Ensure compliance with the Fair Work Act 2009 and any applicable Modern Awards.
Employees on probation may have limited protection but can still file adverse action claims.
Underperformance must be managed with documented reviews and improvement plans.
Serious misconduct may justify summary dismissal without notice.
Contractual Grounds of Termination
Employment contracts, similar to any other legal agreement, can be terminated under specific grounds, including:
Breach of Contract
An employment contract can be terminated if one party fails to adhere to the fundamental terms and conditions. If an employer breaches the contract, the employee may be entitled to damages or other legal remedies. Conversely, a breach by the employee can lead to dismissal.
Mutual Agreement to Terminate Contract
Both the employer and employee can agree to end the contract mutually. This method often includes settlement terms beneficial to both parties. This is a voluntary process which must be documented in writing to avoid disputes later.
Termination for Serious Misconduct
Serious misconduct justifies summary dismissal by an employer. Such misconduct involves actions that severely undermine the employer-employee relationship, like theft or workplace violence.
Performance-Related Grounds for Termination
An employer can terminate an employment contract for poor performance. However, due process must be followed when ending the employment relationship because of performance-related issues.
The following steps must be taken by employers:
- Conduct regular performance reviews.
- Provide feedback and support through a Performance Improvement Plan (PIP).
- Allow the employee reasonable time to improve.
- Document all performance issues and warnings.
If performance does not improve, termination may be lawful.
Common Reasons for Terminating an Employment Contract
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.
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 (such as bullying) 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.
If you’re business is experiencing sexual harassment issues, read on in our article, Sexual Harassment: Compliance for Employers.
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.
An employer may choose to summarily dismiss an employee, report the matter to the police and pursue the employee for recovery of stolen goods.
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 other employees.
Here’s where redundancy comes in. Redundancy doesn’t just come about because a person’s role is no longer required to be performed by that person. Redundancy can also apply because an employer doesn’t require that role to be performed by that specific employee because the duties can be absorbed by 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.
To learn more about employer obligations under the Fair Work Act 2009 (Cth) in our article.
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.
Is there a minimum notice period for termination in Australia?
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.
Can an employer offer a financial settlement instead of notice when terminating an employee?
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.
Employers may also offer an ex gratia payment where appropriate.
What is a termination meeting, and how should companies conduct it in Australia?
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.
Are there specific laws in Australia regarding termination for certain reasons, like redundancy or misconduct?
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.
