Effective Termination: How to terminate employment fairly

Circumstances may arise in which the employment of your employees need to be terminated. Termination attracts various legal obligations of which employers ought to be mindful in order to avoid or minimise litigious repercussions.

From 1 July next year, the Federal Government’s changes to the Work Choices unfair dismissal laws will take effect, which will in turn alter the current legislative termination landscape.


Avoiding or minimising the risk of unfair dismissal claims being brought against you will be largely determined by the terms governing the employment relationship and how these are applied including the provision of notice and the payment of termination entitlements.

Terms of Employment
Ideally, an employment contract will govern the circumstances and terms upon which employment may be terminated. A consistent approach to termination may also be reflected in your businesses policies and/or procedures. If there is no employment contract in place and no award applies, an employee may be entitled to “reasonable notice”. This term has been the subject of a great deal of case law, and an employer may find itself, in some circumstances, being liable for between 3 months and 12 months pay, depending upon the circumstances. For this reason, employers should ensure that they have contracts of employment in place for all of its employees.

The benefit of an employment contract includes being able to tailor the circumstances in which employment may be terminated and the consequences of employment ending by way of careful drafting suited to your business requirements.

To avoid any misunderstanding, you should advise the effected employee individually in writing when giving notice of termination.

If notice is given verbally it should be in unmistakable terms, and should preferably be given in the presence of a witness.

There is nothing to prevent you from accepting the verbal resignation of the employee, including by a telephone conversation. However, you should seek confirmation of the employee’s resignation, preferably in writing, to avoid ‘heat of the moment’ resignations.

Termination Entitlements
Different termination entitlements arise depending on the circumstances upon which employment is terminated.

(a) Summary Dismissal
An employee may be summarily dismissed (without notice) should circumstances warrant for example, in the event of fraud or serious misconduct. Further, the fact that notice of termination of employment has been given does not prevent you from summarily dismissing an employee if the latter is guilty of misconduct during the period covered by the notice. The actual giving of notice does not affect the rights of either party under the contract of employment or the award while such a contract continues on foot.

The circumstances in which you can dismiss your employers summarily may be particularized in an employment contract.

(b) Termination with Notice
Ideally a contract of employment will stipulate the notice applicable upon termination of employment.

Award provisions will generally also make provision for between 1 and up to 4 weeks notice to be given. The requirement in most Awards will make provision for payment to be made in lieu of notice.

Termination with notice or payment being made in lieu of notice would not appear to prevent you mutually agreeing with the effected employee to terminate the contract at any time with payment for time worked only. Where, for instance, an employer gives notice of termination to an employee and that employee desires to terminate their employment as soon as possible, the employer would not be prevented from agreeing to allow the employee to quit immediately with payment up to the time of leaving only.

In taking such action, however, you should ensure that clear evidence is obtained of the willingness of the employee to accept such an agreement in order to be protected from a possible future claim for payment in lieu of notice.

(c) Redundancy
Redundancy or severance pay on retrenchment is normally payable where the individual’s contract of employment or the applicable award provides for such payment. In terms of the severance payment, there is a minimum scale of payments provided by the NSW Employment Protection Act 1982. The Act applies to all permanent employees under NSW awards who work for an employer with more than 15 employees. Employers with less than 15 employees are exempt from these provisions.

Scale of Severance Payments
Continuous Service Under 45 years Weekly Pay Over 45 years Weekly pay
Less than one year Nil Nil
1 year but less than 2 years 4 weeks 5 weeks
2 years but less than 3 years 7 weeks 8.75 weeks
3 years but less than 4 years 10 weeks 12.5 weeks
4 years but less than 5 years 12 weeks 15 weeks
5 years but less than 6 years 14 weeks 17.5 weeks
6 years or more 16 weeks 20 weeks

Payment of Entitlements

Upon termination in addition to notice and severance payable (in applicable circumstances) consideration will also need to be given in respect of payment for:

(a) annual leave not taken;

(b) long service leave, if applicable;

(c) annual leave loading; and

(d) bonuses, commission or incentive payments, where applicable.

Sick leave is not required to be paid out.

You will need to be mindful of relevant award provisions (where applicable) which may require payment to be made on the last day of work or the next pay day.

Labor Initiatives with respect to Unfair Dismissal

A dismissal is unfair when it is ‘harsh, unreasonable or unjust’.

Following the commencement of new unfair dismissal laws from 1 July next year, employers will be required to provide reasonable opportunity to employees to rectify any performance issues rather than simply being dismissed (essentially a reversion to pre-Work Choices reforms).

Consideration will need to be given to performance management processes and dismissal procedures to ensure compliance with the new legislation.

Small Employers

The Fair Dismissal Code (which does not apply to businesses with 15 or more employees) will apply from 1 July 2009.

Under the Code, employers are required to follow a code of practice checklist with a view to having the termination or dismissal deemed to be fair.

From 1 July 2009, if an employee decides to make an unfair dismissal claim and an informal„ conference held by Fair Work Australia rules that the Fair Dismissal Code checklist was followed correctly then the claim is dismissed and the dismissal stands.

Unfair dismissal claims must normally be lodged with Fair Work Australia within 7 days. Fair Work Australia will make initial inquiries and discuss the issues with employers and employees, “including in informal conferences at mutually agreed locations, with a view to achieving a mediated resolution”.

If after the Fair Work Australia process the dismissal is found to be unfair, the maximum compensation is 6 months pay, with the full amount only available in exceptional cases.

To discuss your employment and termination practices or for more information, please contact Andrew Bland at [email protected].

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