Unfair dismissal claims: a 2026 guide for small business owners

For a small business, an unfair dismissal claim can be stressful, time-consuming and expensive. Most claims can be avoided with a fair process and good records. This guide explains who can make an unfair dismissal claim in 2026, how the Fair Work Commission decides whether a dismissal was unfair, how the Small Business Fair Dismissal Code works and what to do if a claim arrives. For the basics, read our guide to unfair dismissal.

Who can make an unfair dismissal claim in 2026?

An employee is protected from unfair dismissal if they have completed the minimum employment period and either:

• a modern award or enterprise agreement covers them; or
• their annual earnings are below the high income threshold, which is $190,100 from 1 July 2026.

The minimum employment period is 6 months, or 12 months with a small business employer. Casual service counts only if the employee was a regular casual with a reasonable expectation of continuing work.

The high income threshold is not an award cut-off. An award-covered employee keeps unfair dismissal protection whatever they earn, unless you have given them a written guarantee of annual earnings above the threshold. The threshold is indexed every 1 July, so check fwc.gov.au for the current figure.

The claim must be lodged with the Fair Work Commission within 21 days after the dismissal took effect. The Commission can allow more time only in exceptional circumstances.

Are you a small business employer?

You are a small business employer if you have fewer than 15 employees at the time of the dismissal. When you count:

• include full-time, part-time and regular casual employees (irregular casuals are not counted);
• count associated entities as one employer; and
• include the employee being dismissed and anyone else dismissed at the same time.

Industry groups have proposed lifting the threshold, but no change has been legislated.

When is a dismissal unfair?

The Fair Work Commission will find that a dismissal was unfair if it was harsh, unjust or unreasonable, was not consistent with the Small Business Fair Dismissal Code (for small business employers) and was not a case of genuine redundancy. In deciding whether a dismissal was harsh, unjust or unreasonable, the Commission looks at matters such as:

• whether there was a valid reason related to the employee's capacity or conduct;
• whether the employee was told the reason and given an opportunity to respond;
• whether you unreasonably refused to let them have a support person at discussions about dismissal;
• for poor performance, whether they were warned before the dismissal; and
• how the size of your business and any lack of dedicated HR expertise affected the process you followed.

Sexual harassment in connection with work can be a valid reason for dismissal.

How the Small Business Fair Dismissal Code protects small business

The Small Business Fair Dismissal Code applies only to small business employers. Following it is voluntary, but if you comply with it, the dismissal is treated as fair. Under the Code:

• Summary dismissal: you can dismiss without notice or warning if you believe on reasonable grounds that the employee's conduct is serious enough to justify immediate dismissal, for example theft, fraud, violence or serious breaches of safety procedures.
• Other dismissals: give the employee a valid reason, based on their conduct or capacity, why they are at risk of dismissal; warn them (preferably in writing) that they may be dismissed if there is no improvement; give them an opportunity to respond and a reasonable chance to fix the problem, for example with training; and let them have another person present in discussions about dismissal (not a lawyer acting in a professional capacity).

You must be able to show you complied, so complete the Fair Work Ombudsman's Code checklist and keep records. The Code doesn't remove notice obligations under the National Employment Standards, except for serious misconduct. It is also a different instrument from the Voluntary Small Business Wage Compliance Code, which deals with underpayments.

Genuine redundancy is not unfair dismissal

A dismissal that is a genuine redundancy can't be an unfair dismissal. A redundancy is genuine if you no longer need the employee's job to be done by anyone because of changes in the operational requirements of your business, and you complied with any obligation in an award or enterprise agreement to consult about the redundancy. It is not genuine if it would have been reasonable to redeploy the employee within your business or an associated entity.

Small business employers generally don't have to pay National Employment Standards redundancy pay (except in some insolvency cases), but notice obligations still apply. See our guide to redundancy pay.

What to do if you receive an unfair dismissal claim

1. Note the dates. Read everything the Fair Work Commission sends you and respond by the date it gives.
2. Check the basics. Was the employee protected (minimum employment period, plus award or agreement coverage or earnings below $190,100)? Was the claim lodged within 21 days?
3. Gather your records. Collect warnings, meeting notes, performance documents, the Code checklist and the termination letter.
4. Prepare for conciliation. Many claims are dealt with first at a conciliation conference run by the Fair Work Commission, where the parties try to reach a settlement.
5. Get support early. Our Fair Work representation for employers can help you respond to the claim and prepare for conciliation.

If the Commission finds that the dismissal was unfair, its main remedy is reinstatement. It can order compensation only if reinstatement is inappropriate. For dismissals on or after 1 July 2026, compensation can't exceed $95,050 or 26 weeks' pay, whichever is less, and it can't include an amount for shock, distress or humiliation. The Commission must also reduce compensation if the employee's misconduct contributed to the dismissal.

An employee who can't claim unfair dismissal, for example because they haven't completed the minimum employment period, may still be able to make a general protections claim about the dismissal. That claim must also be made within 21 days.

How to reduce the risk of unfair dismissal claims

• Put clear contracts and HR policies and procedures in place, so expectations are written down.
• Manage performance early, with documented warnings and a real chance to improve. Our guide to termination of employment covers the process.
• Investigate misconduct allegations fairly before you decide, and give the employee a chance to respond.
• Let the employee bring a support person to meetings about dismissal.
• For redundancies, consult as your award or agreement requires and consider redeployment.
• Get advice before you dismiss. A quick call to our 24/7 HR advice line can save a costly claim.

Need help with an unfair dismissal claim? Talk to an HR adviser

Whether you're planning a dismissal or have just received a claim, Employment Compass can help. Call our team on 1300 144 002 for practical advice, or find out about our unfair dismissal claim support. For more, browse our employment law guides.

Unfair dismissal FAQs for small business

How long does an employee have to lodge an unfair dismissal claim?

21 days after the dismissal took effect. The Fair Work Commission can allow more time only in exceptional circumstances.

Can an employee of a small business claim unfair dismissal in their first year?

No. Employees of a small business employer (fewer than 15 employees) must complete 12 months' employment before they can claim unfair dismissal. Other claims, such as a general protections claim, may still be possible.

What is the maximum compensation for unfair dismissal in 2026?

For dismissals on or after 1 July 2026, compensation is capped at $95,050 or 26 weeks' pay, whichever is less. The cap is indexed every 1 July.

Can a high-income employee claim unfair dismissal?

Yes, if a modern award or enterprise agreement covers them. Employees who are not covered by an award or agreement can claim only if their earnings are below the high income threshold ($190,100 from 1 July 2026).

Do I have to follow the Small Business Fair Dismissal Code?

No, it's voluntary. But if you are a small business employer and you comply with it, the dismissal is treated as fair. Keep records so you can show you followed it.