Managing People Risk in SMEs: A Practical Guide for Business Owners & Leaders
As businesses grow, people decisions carry greater legal and financial consequences. Most Fair Work claims are not the result of bad employers. They arise from - rushed decisions, informal processes, poor documentation and misunderstood award obligations.
This guide outlines the most common termination risks facing SMEs and provides practical steps to reduce exposure.
1. Understanding the Legal Landscape - Unfair Dismissal
An unfair dismissal claim arises when an employee alleges their termination was:
• Harsh
• Unjust
• Unreasonable
Fair Work assesses:
• Was there a valid reason?
• Was the employee notified?
• Were they given an opportunity to respond?
• Were warnings provided where appropriate?
Eligibility:
• 6 months’ service (employers with 15+ employees)
• 12 months’ service (small business employers)
Remedies may include reinstatement or compensation (capped at 6 months’ wages)
General Protections (Adverse Action)
General Protections claims are more serious and often more costly. They apply:
• From day one of employment
• With no compensation cap
• With reverse onus of proof (the employer must prove the reason was lawful)
These claims arise where dismissal is linked to:
Workplace Rights
• Complaints or inquiries
• Personal leave
• Flexible work requests
• Safety concerns
• Workers compensation claims
• Participation in investigations
Protected Attributes
• Age • Sex • Disability • Pregnancy • Race • Religion • Carer responsibilities • And other protected characteristics. General Protections is about why the decision was made not whether it was fair.
2. Why Performance Management Fails in SMEs
Common reasons:
• Avoidance of difficult conversations
• No clear KPIs
• Inconsistent standards
• Emotional decision-making
• Verbal discussions with no documentation
Informal systems work until they don’t.
3. The Right Way to Manage Performance
Step 1 – Set Clear Expectations
• Position descriptions • Defined Key Performance Indicator’s (KPI’s) • Regular feedback
Step 2 – Early Intervention
• Address issues promptly • Focus on behaviour and impact • Document discussions
Step 3 – Procedural Fairness
• Notify concerns
• Provide evidence
• Allow response
Step 4 – Performance Improvement Plan (PIP)
• Specific performance gaps
• Measurable outcomes
• Reasonable timeframe
• Support provided
• Scheduled reviews
4. High-Risk Termination Scenarios
Certain terminations significantly increase risk exposure.
A) - After a Workplace Right is Exercised Timing matters.
Dismissing shortly after a complaint or leave creates vulnerability.
B) - During Illness or Injury You must:
• Separate performance from medical capacity
• Consider reasonable adjustments
• Obtain appropriate evidence Failure to do so may trigger:
• Adverse action claims
• Disability discrimination
• Workers’ compensation penalties
C) - No Procedural Fairness:
Even with a valid reason, a poor process can result in a claim. Red flags are:
• No warnings
• No response opportunity
• “Decision already made” meetings
D) - “Not a Good Fit” This phrase often indicates:
• No KPIs
• No documentation
• No measurable concerns
E) - Emotional or Reactive Decisions Triggered by:
• Conflict
• Heated emails
• Senior leader pressure
• Sudden restructure
If a decision is rushed and undocumented, it is difficult to defend.
5. Award & Payroll Risk
Many SME claims arise from Award misinterpretation, such as:
• Incorrect classifications
• Missed allowances
• Casual loading errors
• Overtime misunderstandings
Underpayments can be backdated up to 6 years. Payroll calculates and HR interprets risk.
6. Performance Improvement Documentation Best Practice
Effective documentation should include:
• Date and time
• Specific conduct or KPI issue
• Impact on business
• Employee response
• Agreed actions
• Review date
• Chronology of events
Avoid:
• Backdating notes
• Vague language
• Inconsistent records
7. The SME Comfort Trap
Common mindset risks:
• “We’ve never had a claim.”
• “It’s always been fine.”
• “We’ve done it this way for years.”
The absence of a claim does not equal compliance. It usually means the trigger hasn’t happened yet.
Final Takeaway:
Most Fair Work claims are preventable. They rarely begin in court. They begin in:
• A rushed meeting
• An emotional decision
• A poorly worded email
Before terminating, ask:
• Is there a valid reason?
• Is it documented?
• Has the employee had an opportunity to respond?
• Would this withstand scrutiny?
A short conversation upfront is far cheaper than defending a claim later.
Disclaimer -This guide is provided for general informational purposes only and does not constitute legal advice. The information contained in this publication is based on Australian workplace laws and Fair Work principles as of February 2026. Workplace legislation, awards and case law are subject to change, and the application of the law will depend on the specific circumstances of each business. Readers should obtain tailored workplace relations advice relevant to their particular situation before making employment decisions. Track HR Consultancy accepts no liability for any loss or damage arising from reliance on the information contained in this guide.