How To Terminate An Employee

Ending someone’s employment is one of the toughest tasks you’ll face as a business owner. It’s emotional, time‑sensitive and, most importantly, governed by strict legal rules under Australian employment law.

The good news is that with a clear, fair process and the right documents, you can make lawful termination decisions and minimise the risk of disputes, unfair dismissal claims or civil penalties.

In this guide, we’ll walk through when you can terminate, the exact steps to follow, what to pay, and the key documents you should have in place before and after you end employment in Australia.

When Can You Terminate An Employee In Australia?

In Australia, you can terminate an employee for a valid reason and with a fair process. Valid reasons typically fall into three broad categories:

• Conduct: Serious or repeated misconduct (for example, theft, harassment, serious breach of policy). In cases of alleged misconduct, ensure a proper investigation and a fair opportunity to respond.
• Capacity or Performance: The employee cannot perform the inherent requirements of the role, or performance is unsatisfactory after a reasonable support and improvement process.
• Genuine Redundancy: The role is no longer required to be performed by anyone due to changes in operational requirements, and you’ve consulted as required under any applicable award or enterprise agreement.

Termination must also comply with the Fair Work Act 2009 (Cth) and any applicable modern award, enterprise agreement and the employee’s contract. Some dismissals are unlawful regardless of process, including terminations for discriminatory reasons or because an employee exercised a workplace right (these are known as general protections claims).

For casuals, the framework is slightly different, but casual employees are still protected from unlawful adverse action and (in some cases) unfair dismissal. If you’re dealing with a probationary employee, the process is simpler but you still need a valid reason and basic procedural fairness. If you’re specifically looking at probation, it’s worth reading about termination during probation.

Step-By-Step: How To Terminate An Employee Lawfully

1) Review The Contract, Award And Policies

Start by checking the employment contract, any applicable modern award or enterprise agreement, and your workplace policies. Confirm termination clauses, notice periods, probation terms, consultation obligations and any disciplinary procedure you’ve committed to follow.

2) Identify A Valid Reason (And Gather Evidence)

Make sure you can clearly articulate the reason for termination and back it up with records. For performance or capacity issues, keep performance reviews, warnings and improvement plans. For misconduct, collect witness statements, system logs or other relevant evidence.

3) Follow Procedural Fairness

Procedural fairness (sometimes called natural justice) is essential. This usually means putting the allegations or concerns to the employee in writing, providing the evidence, giving them reasonable time to respond, and genuinely considering their response before you decide.

Many employers use a formal letter to start this process. If you need a template and guidance, see how show cause letters work in practice.

4) Consider Suspension Or Stand Down (If Misconduct Is Alleged)

If the situation involves serious allegations, it may be appropriate to suspend the employee on pay while you investigate, or in limited circumstances, stand them down. This decision must align with your contract, policy and any award. If you’re weighing your options, read more about standing down an employee pending investigation.

5) Decide The Outcome And Type Of Exit

Once the process is complete, decide whether the outcome is termination, final warning, redeployment (for redundancy) or another measure. For employees leaving immediately, you might choose notice or payment in lieu of notice (PILON), depending on your contract and the circumstances. In some cases, garden leave is appropriate while the employee works out their notice; here’s a deeper look at garden leave in Australia.

6) Deliver The Decision Meeting And Confirm In Writing

Schedule a meeting to communicate the decision respectfully. Keep it professional, state the reason briefly, confirm last day of employment, explain entitlements and returning company property, and outline next steps.

Follow up with a termination letter confirming the key details (reason, notice, final pay and logistics). Store your records securely.

7) Calculate And Pay Final Entitlements On Time

Final pay must include outstanding wages, accrued but unused annual leave, any applicable leave loading, and (if relevant) notice, redundancy pay, commission or bonus amounts under the contract. Timing rules can vary, but paying promptly is best practice. Use this practical guide to calculating final pay and what to include.

8) Consider A Separation Agreement (If Appropriate)

For senior roles or sensitive exits, you may want an Employee Separation Agreement (often with a deed of release). It can confirm confidentiality, return of property, post‑employment restraints, non‑disparagement and a settlement package.

9) Issue Required Documents And Close Out Access

Depending on the situation, you may need to provide a separation certificate (for Services Australia), certificate of employment, and a detailed final payslip. Reclaim company property, revoke system access and update your registers. Keep a clean audit trail in case a dispute arises later.

What Are Your Notice, Final Pay And Entitlements Obligations?

Most permanent employees are entitled to notice or payment in lieu, based on their continuous service. Minimum notice under the National Employment Standards (NES) ranges from one to four weeks, and may be increased by one additional week if the employee is over 45 and has at least two years’ service. The contract or an award may require longer notice; if so, the longer period applies.

For serious misconduct, you may be able to terminate without notice (summary dismissal), but only if the conduct meets the high threshold. Always investigate and follow fair process before you decide.

When you opt for PILON, pay the employee what they would’ve earned if they had worked their notice period. This option is common where it’s best for the business that the employee ceases work immediately. To understand the mechanics, refer to this guide on payment in lieu of notice.

Final pay must include anything owed under the NES, the contract or an award. Be careful about set‑offs or deductions - there are strict limits on withholding pay from employees, even if company property hasn’t yet been returned.

If the employee isn’t required to work during notice, consider whether garden leave keeps your business and client relationships protected while still meeting your obligations (see garden leave for common clauses and pitfalls).

Handling Misconduct, Performance And Probation Terminations

Misconduct

For allegations of misconduct, act promptly but fairly. Consider suspension (on pay) or stand down (in limited circumstances) while you investigate. Issue a written notice of allegations, provide relevant evidence and give the employee a chance to respond - in writing and/or at a meeting, with a support person if they request one.

Keep your mind open until you’ve considered their response. If you decide to terminate, your letter should reference the misconduct, the process you followed and the effective date. For structure and content, many employers pattern their communications on show cause letters and outcome letters.

Underperformance Or Capacity

Termination for poor performance generally requires a documented performance management process: clear expectations, reasonable support and time for improvement, and formal warnings. Without this, a dismissal is more likely to be challenged as unfair.

If the issue relates to capacity (for example, the employee cannot perform the inherent requirements due to health), take extra care. Obtain medical information lawfully and consider reasonable adjustments. It’s unlawful to dismiss for discriminatory reasons - get advice if you’re in this territory.

Probation

Probation periods don’t remove your need for a valid reason and fair process, but they can shorten notice and reduce unfair dismissal eligibility risks depending on length of service. Still, document concerns, meet with the employee and confirm the outcome in writing. For the practical do’s and don’ts, see termination during probation.

Administrative Next Steps

Once the decision is made, calculate entitlements, prepare the termination letter, collect property and cut access. Some employers also use post‑employment restrictions (like non‑solicit) that were agreed in the contract; ensure they’re reasonable and enforceable for your industry. Where there’s mutual benefit in a clean break, a tailored Separation Agreement can help draw a line under the relationship.

Redundancy Vs Termination: What’s The Difference?

A genuine redundancy is not about the person - it’s about the role no longer being needed due to operational changes (for example, restructuring, new technology or a downturn). A non‑genuine redundancy dressed up to exit a person carries high risk of unfair dismissal or general protections claims.

To be genuine, you must consult as required under any award or enterprise agreement, consider redeployment within the business or associated entities, and pay redundancy pay if applicable under the NES (some small businesses are exempt). It’s also common to address the interaction between redundancy and leave entitlements, so review your instruments carefully.

If you’re mapping out a restructure or need to calculate entitlements, this overview of redundancy payments in Australia is a good starting point. And if sickness or personal leave is involved during a restructure, this practical piece on redundancy and sick leave covers common scenarios.

What Documents Should You Have In Place?

Strong, tailored documents make terminations smoother and more defensible. At a minimum, consider the following:

• Employment Contract: Sets clear termination, notice, garden leave, set‑off and post‑employment restraint clauses. A well‑drafted Employment Contract can prevent ambiguity when parting ways.
• Workplace Policies: Codes of conduct, performance management, grievance and investigation procedures - ensure policies are current and consistently applied.
• Show Cause And Warning Templates: For procedural fairness during performance or misconduct matters (see guidance on show cause letters).
• Termination And Exit Pack: Letters, checklists, and a clear process for property returns, access removal and final pay. Many employers use a curated Employee Termination Documents Suite to keep everything consistent.
• Separation Agreement (Deed Of Release): Helpful for negotiated exits to cover confidentiality, non‑disparagement, IP return, and release of claims (see Employee Separation Agreements).

Having these documents tailored to your business, industry and awards reduces risk and speeds up your internal process when issues arise.

Key Takeaways

• Always have a clear, evidence‑based reason to terminate and follow a fair process - this is your best defence against claims.
• Check the employment contract, any applicable award or enterprise agreement, and your policies before you start the process.
• Use structured steps: put allegations in writing, give a chance to respond, assess fairly, then confirm the outcome and final pay in writing.
• Meet your obligations on notice (or payment in lieu of notice), and calculate all final entitlements correctly using a clear approach to final pay.
• Where the role is no longer required, treat it as a potential redundancy and follow consultation, redeployment and redundancy pay requirements.
• Put strong contracts, policies and an exit documents suite in place so you can act quickly and compliantly when issues arise.

If you’d like a consultation on how to terminate an employee lawfully in Australia (including drafting letters or separation agreements), you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no‑obligations chat.