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How Can an Employer Terminate an Employment Agreement?

Last revision:
Last revision: 1st October 2019
Last revision:
Category: Human Resources and Employment Law

Terminating an employee is a stressful and challenging experience for many Australian employers. In addition to the various emotions that are likely to be involved, particularly on the part of the employee, there is also the possibility of legal action if the employer does not handle the matter properly. Therefore, it is important that any employers carefully consider how they are going to handle the termination of employment, and if in doubt, seek legal advice.


Why might an employer want to terminate an employment agreement?

There are various reasons why an employer might want to terminate an employment agreement. The employer might be failing to perform their job to the standard required by the employer. The employee might have done something that creates problems for the employer's business and/or reputation. The employee might have committed some kind of serious misconduct which threatens the well being of other people or property. Or in other cases, the employer's business needs might have changed, and the employer may no longer require anybody to do the job which the employee has been doing (in other words, the employee's position might be made redundant).


What are the risks of terminating an employment agreement?

There are many risks that employers may encounter as a result of a poorly handled termination.

Firstly, if the employee feels aggrieved by the termination, then they may engage in some kind of spiteful or revengeful behaviour which could have serious consequences for the employer. This could involve theft or damage to the employer's physical property or intellectual property, release of the employer's confidential information, or the general spreading of negative information about the employer either through social media or otherwise.

In addition, there are various legal risks for the employer to consider. If the termination does not comply with the terms of the employment agreement, then the employee may make a successful claim against the employer for breach of contract. If the termination involves an unfair dismissal or some other breach of the Fair Work Act 2009 (Commonwealth), then the employee may take action under that legislation. If the employer is found to have engaged in discrimination (as it is defined under Australian law), then the employer may also face legal consequences under state or federal anti discrimination legislation.


What can employers do to terminate an employment agreement?

There are a number of steps which employers can take in order to ensure the termination proceeds smoothly. The circumstances and the reason for the determination will dictate the particular steps that the employer may be required to take.


Think carefully about the reason for the termination

Depending on the reason for the termination, there may be different ways in which the employer needs to handle it.

Australian law prohibits the termination of an employee's employment on grounds which are, at least partially, discriminatory. This includes termination on the basis of the employee's race, colour, sex, sexual orientation, age, mental or physical disability, marital status, family or carer's responsibilities, pregnancy, religion, political opinion, national extraction or social origin.

In addition, Australian law prohibits the termination of an employee because they have exercised a workplace right, or because they are involved in industrial activities (such as joining a union).

Most Australian employees are covered by the Fair Work Act 2009 (Commonwealth). Under that legislation, an employer may not terminate an employee for a reason which is 'harsh, unjust or unreasonable' (as defined in that legislation). Effectively, this means that the termination must be for valid reason - either due to the employee's conduct, or their capacity to do their job. The Fair Work Ombudsman provides guidance on this matter.

If the employer is terminating the employment because the employee's position is being made redundant, then the employer may have other obligations to consider such as the payment of redundancy pay.


Termination due to redundancy

Redundancy occurs when:

  • the employer doesn't need the employee's job to be done by anyone; or
  • the employer becomes insolvent or bankrupt.

In other words, the job, rather than the employee, has been made redundant. Redundancy does not occur as a result of the employee's conduct or job performance.

If a genuine redundancy is occurring, then the employer may be required to provide redundancy pay to the employee. In addition, if an employee is being terminated due to redundancy, the employee may not be able to claim an unfair dismissal.


Check any relevant instruments such as the employment contract, an industrial award, registered agreement, or the National Employment Standards

Early in the process, the employer should make sure that it understands its rights and obligations regarding redundancy. In particular, the employer will need to know whether redundancy will apply, and if so, the terms of that redundancy (such as processes to follow, amounts of redundancy pay and any minimum notice periods).

Minimum standards for employment are set in the National Employment Standards. However, if there is an applicable industrial instrument (such as an award or a registered agreement), then this may set additional requirements. In addition, a contract of employment or a workplace policy might also set additional requirements. In any case, the employer will need to comply with whatever requirements are most favourable to the employee. The National Employment Standards are only the minimum standards.

For small businesses, it is also important to check the Small Business Fair Dismissal Code.

Further information about these matters may be obtained from the website of the Fair Work Ombudsman. If the employer is still unsure about these obligations, then the employer may need to seek legal advice.


Communicate openly with the employee(s) and follow any necessary consultation processes

If changes are happening in the employer's business, causing the employer to consider redundancies, then the employer should make sure to communicate regularly with employees.

In many cases, the relevant instrument such as the contract, modern award, enterprise agreement, or the National Employment Standards may require the employer to consult with the employee regarding changes in the business, and may explain the process which the employer must follow. This may also include minimum notice requirements.

If the employer is in any doubt, then they should seek legal advice.

We have a Letter of Termination of Employment (Redundancy) which may be used once to terminate the employment for redundancy.


Pay any applicable redundancy pay

For genuine redundancies, employees may also be entitled to a certain amount of redundancy pay. It is important that the employer understands their obligations in this regard, and pays the employee appropriately.

The relevant instrument such as the contract, modern award, enterprise agreement, or the National Employment Standards may provide this information but if the employer is in any doubt, they should seek legal advice.


Termination for serious misconduct

'Serious misconduct' may occur if an employee:

  • causes serious and imminent risk to the health and safety of another person or to the reputation or profits of the employer's business; or
  • commits theft, fraud or assault; or
  • refuses to carry out a lawful and reasonable instruction which is part of their job.

If an employee commits serious misconduct, as defined under the Fair Work Act 2009 (Commonwealth), immediate dismissal may be permitted (meaning no notice is required).

However, if this occurs, the employer would still be required to pay the employee all outstanding entitlements such as payment for time worked, unpaid annual leave, and in some cases, unpaid long service leave.

If the employer has any doubt as to whether serious misconduct has occurred, they may seek legal advice.

 

Termination for other reasons

If the employment is not being terminated due to redundancy or serious misconduct (for example, if the employment is being terminated due to unsatisfactory performance) then there are a number of steps which the employer will still need to follow. These are set out below.


Give the employee notice of the employer's concerns

Before actually terminating the employment, it is important to notify the employee that the employer has concerns about their performance. We have an Employee General Warning Letter which can be used for this purpose.


Give the employee a genuine opportunity to respond

Once the employee has been notified of the employer's concerns, and the possibility of termination of employment, the employee should be given an opportunity to respond to these concerns. In effect, this means giving the employee the opportunity to change the employer's mind. It is important that this is actually a genuine opportunity for the employee to respond, and that the employer does not simply 'go through the motions' of providing this opportunity. Even if the employer has a valid reason to terminate the employee's employment, if they do not provide notice and a genuine opportunity to respond, then the termination could be found to be unreasonable.


If the employee is being dismissed for unsatisfactory performance - make sure they are first warned that their employment is at risk

If the employer is considering terminating the employee's employment due to unsatisfactory performance, then it is important that the employer also gives the employee a written warning that clearly explains that the employee's performance is below the acceptable standard, and that their employment may be terminated. This warning should also clearly explain what the employee needs to do in order to rectify the situation. We have an Employee Final Warning Letter which can be used for this purpose.


Give the employee the time and opportunity to actually improve their performance

Once the employee has been warned, and has been given an explanation of how to improve their performance, it is important that they actually be given the opportunity (and enough time) to improve their performance.

The necessary time period may vary, depending on the nature of the employment. However, generally speaking, anything less than one month may be insufficient.


Give the employee sufficient notice that their employment is being terminated

If the employer has been through all of the previous steps, and the employee still has not improved their performance, then the employer may consider actually terminating the employment.

In most cases, the employer has to provide the employee with a certain amount of notice (or payment in lieu of that notice) before actually terminating their employment. In other words, rather than terminating the employment immediately, the employer needs to notify the employee that the employment is being terminated as of some future date.

In many cases, the employer may be required by law to provide the employee with a certain amount of notice, but might prefer that the employee actually stops working for the employer immediately. In these circumstances, many employers choose to provide the employee with payment in lieu of notice. This means that, for example, if the employer was required to give 4 weeks' notice, they instead direct the employee to stop working immediately, but pay the employee for the next 4 weeks of work.

Minimum notice periods are set out in section 117 of the Fair Work Act 2009 (Commonwealth), and/or in the contract of employment (whichever is longer).


Communicate the termination to the employee in an appropriate and respectful manner

The appropriate manner in which to communicate the termination to the employee may depend on the nature of the employment. In any event, the termination should be communicated in a considerate and respectful manner.

Most employers choose to hold a face to face meeting with the employee in order to communicate the termination to them - as this can often reduce the likelihood that the employee feels aggrieved by the termination.

The Fair Work Act 2009 (Commonwealth) says that if the employee wants to have a support person present, then the employer cannot 'unreasonably deny' this request. The Fair Work Act 2009 (Commonwealth) does not require the employer to actually offer the employee an opportunity to have a support person present, but many employers choose to do this anyway.

The employer may also impose restrictions on who the support person is, and may also require the support person to sign a Confidentiality Agreement. For example, many employers do not permit the employee to bring a lawyer to the meeting. The support person is not an advocate for the employee and does not usually take part in the meeting. If the employer finds that the support person repeatedly interrupts the meeting, then it may be reasonable for the employer to ask them to leave.

If the employer has any concerns about this process, then they should strongly consider seeking legal advice, before terminating the employee.


In conclusion

Terminating employees is unfortunately a realistic part of running a business in Australia. It can be a stressful process and there are various risks for employers who do not follow the appropriate processes.

This guide provides an outline of the key steps that employers can consider. However, every business is different, so some employers find that somewhat different approaches are appropriate. Nevertheless, it is important that all employers consider their various legal obligations, many of which we have touched upon in this guide.

There can be significant consequences, whether legally or commercially, for employers that get this wrong. Therefore, if employers have any concerns about how to deal with the termination, they should strongly consider seeking legal advice.


Templates and examples to download in Word and PDF formats

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