Running a small business is tough, and managing underperformance can be one of the trickiest parts. If you have an employee who’s been with you for over a year and things aren’t working out, you need to handle the situation carefully. There are legal requirements to follow, but also best practices to make the process as smooth (and fair) as possible.

Key Legal Basics: What You Need to Know

If your business has fewer than 15 employees, different rules apply compared to larger companies. The main thing to remember is the 12-month rule. Once an employee has worked for you for more than 12 months, they gain unfair dismissal protections under the Fair Work Act. This means you can’t just let them go without a fair reason and process.

Best Practices for Performance Management

Before you even think about termination, it’s important to give the employee a real chance to improve. Here’s how you can manage underperformance effectively:

1. Keep Records – Document everything! Write down any issues, feedback given, and steps taken to support the employee.
2. Give a Clear Warning – If performance isn’t up to scratch, give a formal warning in writing. Make sure they understand what needs to change.
3. Offer Support – Training, mentoring, or just clearer instructions can sometimes help an employee get back on track.
4. Set a Timeframe – A fair Performance Improvement Plan (PIP) should outline expectations and give them a reasonable time to improve.

When Termination Becomes an Option

If, after all that, the employee still isn’t performing, it’s likely that you will be considering termination. As a small business employer, you should ensure you are familiar with the Small Business Fair Dismissal Code (SBFD code).

The SBFD Code outlines the following:

• Generally speaking, the employee must have been given a chance to improve. Issuing at least one warning prior to considering termination is one way that you can ensure that they have been given clear feedback and an understanding of the expectations.
• Hold a meeting to discuss the situation before making a final decision.
• If termination is the only option, provide written notice and the required notice period (or payment in lieu).

If the issue involves serious misconduct (like theft or violence), you may be able to dismiss immediately, but make sure you have solid evidence (and seek advice!).

Protections That Still Apply

Even though unfair dismissal rules kick in after 12 months, there are still other protections to keep in mind:

• General Protections – Employees can’t be fired for reasons that fall under a ‘protected right’, which includes factors like making a workplace complaint, taking sick leave, or being pregnant.
• Unlawful Termination – You can’t dismiss someone based on discrimination (e.g., race, gender, religion, etc.).
• Redundancy Rules – If the role is genuinely no longer needed, ensure that you undertake a genuine redundancy process, and don’t a disguise it as a dismissal.

Final Thoughts

Handling underperformance and potential termination in a small business is not always straightforward, but following the right steps makes a big difference. Keep things fair, document everything, and use the SBFD Code as your guide. 

Any questions? Reach out or drop a line if you want to discuss your specific situation… 

It’s always good to check with an HR expert or legal professional before making any decisions involving disciplinary action or termination of employment, to avoid a potential Unfair Dismissal claim or even further legal action from your departing employee.

Nick Hedges is the founder of Resolve HR, a Sydney-based HR consultancy specialising in providing workplace advice to managers and business owners. He recently published his first book, “Is Your Team Failing Or Kicking Goals – Take Control of Your People & Their Performance”. It is a practical response to the most pressing HR challenges, which can be found at https://resolvehr.com.au/.

Disclaimer: The contents written do not constitute legal advice and do not cater for individual circumstances.   The information contained herein is not intended to be a substitute for legal advice and should not be relied upon as such.