What is ending an employment contract?
Ending an employment contract means that the agreement between an employer and an employee is coming to an end, and both parties are no longer bound by the terms of that agreement. This can happen for various reasons, including voluntary resignation by the employee, termination or dismissal by the employer, redundancy, or the expiration of a fixed-term contract.
Regardless of the reason, it's important to follow the correct procedures and comply with Australian employment laws to ensure a fair and lawful process.
Unfair dismissal
An employee can claim unfair dismissal if they believe their dismissal was harsh, unjust, or unreasonable. The Fair Work Commission (FWC) will consider factors such as whether there was a valid reason for the dismissal, if the employer followed a fair procedure, and whether the employee was given any warnings.
The high-income threshold for unfair dismissal is $175,000 per year (from 1 July 2024). The maximum compensation that can be awarded by the FWC is $87,500 for a dismissal that occurred on or after 1 July 2024.
To avoid unfair dismissal claims, employers should:
✅ Have a valid reason for dismissal which could include poor performance, misconduct, or redundancy.
✅ Follow a fair procedure which includes providing warnings, giving the employee an opportunity to respond to any allegations, and allowing them to have a support person present during any discussions about dismissal.
✅ For small businesses, follow the Small Business Fair Dismissal Code. This Code provides a framework for small businesses to follow when dismissing employees, which can help protect them from unfair dismissal claims.
It's important to remember that unfair dismissal relates to the manner of the dismissal, while unlawful termination relates to the reason for the dismissal. Unlawful termination occurs when an employee is dismissed for a prohibited reason, such as discrimination or temporary absence due to illness.
Ways an employment contract can end
An employment contract in Australia can end in several ways:
❌ Resignation when an employee voluntarily decides to leave their job.
❌ Termination when an employer decides to end the employment contract.
❌ Dismissal is a type of termination, often for serious misconduct.
❌ Redundancy when a job is no longer needed.
❌ Expiration of a fixed-term contract when a contract with a predetermined end date reaches its completion.
Resignation
When an employee resigns, they must give their employer written notice of their intention to leave. While an employee can give more notice than required, the employer does not have to accept it. The amount of notice required is usually outlined in the employment contract, award, or registered agreement.
If these documents don't specify a notice period, the employee must give "reasonable notice." What constitutes "reasonable notice" depends on factors such as the employee's seniority, the nature of their role, and industry practices.
Employer obligations
- Confirm receipt of the resignation and clarify the notice period.
- Encourage the employee to complete tasks and projects and facilitate a smooth transition of responsibilities.
- Ensure all outstanding wages, accrued leave, and other entitlements are paid accurately and on time . Employers can deduct any outstanding amounts owed by the employee from their final pay.
- Maintain accurate records of the resignation, notice period, and final pay details.
Employee obligations
- Submit a formal resignation letter with a clear end date.
- Unless otherwise agreed, fulfil their duties during the notice period.
- Return any company assets, such as laptops, keys, and ID cards.
Employers can deduct wages from an employee's final pay if they don't give the correct amount of notice. However, this can only happen under specific circumstances, such as if the employee provides written consent or if it's permitted under their award or registered agreement.
Termination
Termination occurs when an employer decides to end the employment contract. To ensure a fair process, employers must have a valid reason, such as poor performance, misconduct, or redundancy. Employers must also follow a fair procedure and provide the employee with the required notice or payment in lieu of notice.
Employer obligations
- The reason for termination must be lawful and justifiable, related to the employee's capacity or conduct.
- Follow a fair process, including providing written notice, allowing the employee to respond, and considering any mitigating circumstances.
- Provide the required notice period or payment in lieu of notice, as per the National Employment Standards (NES) or the employment contract.
- Ensure accurate and timely payment of all outstanding wages and entitlements.
- Maintain clear documentation throughout the termination process, including performance reviews, warnings, and the termination letter.
Employee rights
- Receive the required notice period or payment in lieu of notice.
- Receive all outstanding wages and entitlements, including accrued leave and potential redundancy pay .
- If the employee believes the dismissal was unfair, they can lodge a claim with the FWC.
Employers can ask employees to sign a declaration that releases them from obligations related to their dismissal, as long as they have made full payment of all outstanding entitlements .
Dismissal
Dismissal is a type of termination, often used when an employer lets an employee go due to serious misconduct. Serious misconduct can include theft, fraud, assault, or any other conduct that poses a serious risk to the workplace or the employer's business.
In cases of serious misconduct, an employer may be able to summarily dismiss an employee without notice or warning. However, even if an employer doesn't know of grounds for summary dismissal at the time, it can still be a defence if those grounds existed. It's important to ensure that any dismissal is lawful and procedurally fair.
Redundancy
Redundancy occurs when a job is no longer needed, potentially due to restructuring, downsizing, or technological advancements. If an employee resigns during the notice period, they are entitled to the same severance pay they would have received if they had worked until the end of the notice period.
Employer obligations
- Ensure the redundancy is genuine and not a disguised dismissal.
- Consult with affected employees about the redundancy, providing information and exploring redeployment options.
- Provide the required notice period or payment in lieu of notice, along with all outstanding wages and entitlements, including potential redundancy pay.
- In certain circumstances, an employer can apply to the FWC to have the amount of redundancy pay reduced, for example, if the employer finds alternative employment for the employee or if they cannot afford the full amount.
Employee rights
- Receive redundancy pay based on their length of service, if eligible.
- Receive the required notice period or payment in lieu of notice.
- If the employee believes the redundancy is not genuine, they can lodge an unfair dismissal claim.
Fixed-term contract expiration
A fixed-term contract ends automatically on the agreed-upon end date. Generally, no notice or redundancy pay is required for fixed-term contracts unless specified in the contract or applicable award.
From 6 December 2023, employers must give every employee engaged under a new fixed-term contract a copy of the Fixed Term Contract Information Statement (FTCIS). The FTCIS provides information about fixed-term contracts, including the rules about when they can be used.
There are also anti-avoidance protections in place to prevent employers from using fixed-term contracts to avoid providing employees with ongoing employment. These protections prevent employers from ending employment and re-employing the employee on another fixed-term contract for the same or similar work to avoid providing them with the benefits of ongoing employment.
Notice periods
Generally, when ending employment, the employer must provide the employee with written notice of their last day of employment . However, if an employee is dismissed during their probationary period, they are still entitled to notice or payment in lieu of notice based on their length of service.
The NES sets out minimum notice periods for terminating employment:
Employees over 45 years old with at least 2 years of service are entitled to an extra week of notice. These are minimum requirements, and awards, agreements, or contracts may specify longer notice periods.
An employer can choose to let the employee work through their notice period, pay it out (also known as pay in lieu of notice), or use a combination of both. An employee can take annual leave during a notice period if the employer agrees, but an employer can't force an employee to take leave as part of the notice period.
An employee can also take sick leave during a notice period if they give notice of the leave as soon as possible and provide evidence if the employer asks for it (for example, a medical certificate). Public holidays are included in the notice period and don't extend it.
In some cases, an employer may direct an employee to take "gardening leave" for the notice period. Gardening leave is a period where the employee is paid but not required to work during their notice period. This is often used in situations where the employer wants to prevent the employee from accessing confidential information or influencing other employees.
Final Pay
When an employment contract ends, employees are entitled to their final pay, which includes:
✅ Outstanding wages, including penalty rates and allowances.
✅ Accrued but unused annual leave.
✅ Any applicable loading on annual leave.
✅ Payment in lieu of notice, if applicable.
✅ Redundancy pay, if applicable.
✅ Long service leave, if applicable.
Most awards require final pay to be paid within 7 days of the employment ending. Employers can deduct any outstanding amounts owed by the employee from their final pay.
While sick and carer's leave is generally not paid out when employment ends, there might be exceptions under specific enterprise agreements.
Employees can also request an Employment Separation Certificate, which is a written statement specifying the period of employment and the job classification or type of work performed.
Termination letters and conversations
When terminating an employee, it's essential to handle the situation with sensitivity and professionalism. Business owners are required provide a clear and concise termination letter outlining the reasons for termination, notice period, final pay details, and other relevant information.
It is also important to conduct a termination meeting in a private and respectful manner, allowing the employee to ask questions and express their views.
Handling difficult termination conversations
Terminating an employee can be a challenging experience for both the employer and the employee. It's important to be prepared for difficult conversations and handle them with empathy and professionalism .
Here are some tips for handling difficult termination conversations
Exit Interviews
When an employee leaves a business, conducting an exit interview can be a valuable way to gather feedback and identify areas for improvement. Exit interviews can provide insights into the employee's experience, reasons for leaving, and suggestions for improving the workplace.
Final thoughts
Ending an employment contract requires careful consideration of legal obligations and best practices. By understanding the different ways a contract can end, following fair procedures, and communicating effectively, business owners can ensure they handle terminations lawfully and with respect for their employees.
Proactive planning, legal compliance, and compassionate communication are essential when ending employment contracts.
If you need further assistance with ending an employment contract or other HR matters, our 24/7 Advice Line is available to all Australian business owners. Contact us on 1300 144 002 today for expert advice and support tailored to your business needs.