Managing Poor Performance: A Practical Guide for Australian SME Owners

Managing poor performance means identifying the specific gap between what an employee is doing and what the role requires, telling them clearly, giving them a genuine and documented opportunity to improve, and only moving toward formal warnings or termination if that improvement doesn’t happen. Under the Fair Work Act 2009, “unsatisfactory performance” can be a valid reason for dismissal but only if it’s handled fairly. For SME owners without an internal HR team, getting this process right protects both the business and the employee, and is one of the most common sources of unfair dismissal claims when it’s skipped or rushed.

What Counts as “Poor Performance” Under Australian Workplace Law?

Poor performance generally falls under what the Fair Work Act calls an employee’s capacity to do the job as distinct from conduct (behavioural or disciplinary issues). The Fair Work Commission has confirmed that capacity covers more than just physical ability or skill; it also extends to situations where an employee lacks the licence, qualification or accreditation needed to lawfully perform the role.

Common performance issues include:

• Consistently missing output, quality or accuracy standards
• Failing to meet reasonable KPIs or targets after being given a fair chance
• Inability to perform core tasks of the role, including after training
• Ongoing lateness or unreliability that affects the work (this can shade into conduct)

It’s important to separate genuine performance issues from misconduct (like breaches of policy or serious misconduct) and from issues linked to illness, injury or disability, which require a different and more cautious approach, including consideration of reasonable adjustments and discrimination protections.

The Legal Framework: What the Fair Work Act Actually Requires

If a performance-related dismissal is challenged, the Fair Work Commission assesses it against the criteria in section 387 of the Fair Work Act 2009. The Commission must consider, among other things:

• Whether there was a valid reason for the dismissal related to the employee’s capacity or conduct
• Whether the employee was notified of that reason
• Whether the employee was given a genuine opportunity to respond
• Whether the employer unreasonably refused a request for a support person to be present at any discussion about the dismissal
• Critically, if the dismissal relates to unsatisfactory performance: whether the employee had been warned about that performance before the dismissal
• The size of the business and whether that affected the procedures followed, including the presence or absence of dedicated HR expertise

That warning requirement is the single biggest reason performance dismissals get overturned. The Fair Work Commission has found dismissals unfair where an employee was told to resign or was terminated without ever being told, before the decision was made, that their performance was the reason and given a chance to respond.

Who Can Bring an Unfair Dismissal Claim?

Employees generally need to meet a minimum employment period — 6 months for most employers, or 12 months for small business employers (fewer than 15 employees) — before they can apply for unfair dismissal. High-income earners not covered by an award or agreement are also excluded if they earn above the high income threshold, which is $190,100 from 1 July 2026.

Small business employers should also be familiar with the Small Business Fair Dismissal Code, published by the Fair Work Ombudsman, which sets out a process small businesses can follow to help ensure a dismissal is considered fair.

The Practical Steps: How to Manage Poor Performance the Right Way

1. Identify the specific, measurable gap

Vague feedback like “you need to lift your game” doesn’t hold up. Be specific: which task, which standard, which date, and how it compares to what’s reasonably expected in the role — ideally against the employee’s position description or the relevant Modern Award classification.

2. Have an informal conversation first

Not every performance issue needs to start as a formal process. An early, honest, private conversation — with clear examples — often resolves things before they need to escalate. Document what was discussed, even informally.

3. Put expectations and support in writing

If the issue continues, set out in writing: the specific standard required, examples of where it hasn’t been met, the support or training being offered, a reasonable timeframe to improve, and what happens if there’s no improvement. This is often called a Performance Improvement Plan (PIP).

4. Give a genuine opportunity to respond and to improve

The employee must be told the reason for concern and given a real chance to explain their side and to actually improve — not just going through the motions before a decision that’s already been made. Offer a support person at any formal meeting; unreasonably refusing this can itself count against the employer.

5. Document every step

Keep dated records of conversations, warnings, training offered, and the employee’s responses. If it ever reaches the Fair Work Commission, the paper trail — not your memory of events — is what matters.

6. Only move to termination as a last resort

If performance still doesn’t improve after a genuine opportunity, and the employee has been clearly warned, termination may be a valid option — but the process still needs to be procedurally fair, with correct notice under the NES and any applicable award.

This is where structured performance management processes earn their keep — a consistent, documented approach applied the same way every time is far more defensible than an ad hoc reaction to a bad week.

Practical Examples

Example 1 — A retail employee missing sales targets. A homewares store owner notices a sales assistant, employed for 8 months, consistently underperforming against reasonable, comparable targets set for the team. Rather than dismissing on the spot, the owner has an informal conversation, then issues a written improvement plan with a 4-week timeframe, additional product training, and weekly check-ins. The employee doesn’t improve despite genuine support, is issued a final written warning referencing the earlier conversations, and is later dismissed with correct notice — a process that would likely satisfy the s.387 factors if challenged.

Example 2 — Ongoing accuracy errors in a small accounting firm. A bookkeeping firm with 10 staff has a junior team member repeatedly making data entry errors that affect client reporting. The manager documents specific error examples, offers refresher training, and sets a 3-week improvement period with clear criteria. Because the firm has fewer than 15 employees, it also follows the Small Business Fair Dismissal Code’s process as a further safeguard alongside its own documentation.

Common Mistakes SMEs Make When Managing Poor Performance

• Skipping the warning step entirely. Section 387(e) specifically asks whether the employee was warned about unsatisfactory performance — skipping this is one of the most common reasons dismissals are found unfair.
• Giving vague or undocumented feedback. “Do better” isn’t a standard the employee can actually meet or that the Commission can assess.
• Making the decision before the conversation. If the outcome is already decided, the employee hasn’t had a genuine opportunity to respond, and that will count against the employer.
• Confusing performance issues with misconduct and applying the wrong process to each.
• Refusing a reasonable request for a support person at a formal meeting.
• Not adjusting the process for illness, injury or disability where that may be contributing to the performance concern.
• Rushing the timeline. A reasonable opportunity to improve needs to be genuinely reasonable — not a token few days.

Performance Management Checklist

[ ] Specific, measurable performance gap identified and compared to role expectations or award classification

[ ] Informal conversation held and documented before any formal process begins

[ ] Written expectations, support/training offered, and a clear timeframe provided

[ ] Employee given genuine opportunity to respond before any decision is made

[ ] Support person offered for any formal meeting

[ ] All conversations, warnings and outcomes documented with dates

[ ] Small Business Fair Dismissal Code followed, if applicable (fewer than 15 employees)

[ ] Correct notice period and any final entitlements calculated under the NES and applicable award before any termination

Related Reading from the HR Knowledge Centre

• What Are the National Employment Standards (NES)? A Plain-English Guide for SMEs
• Redundancy Obligations for Australian Small Businesses: What You Must (and Don’t) Have to Pay
• Handling Workplace Complaints and Grievances: A Practical Guide for SME Owners

How HR Excellence Partners Supports SMEs

Managing poor performance well is one of the hardest parts of running a small team — it requires the right documentation, the right tone, and the confidence to know you’re following a legally sound process. Get it wrong, and a straightforward performance issue can turn into a costly unfair dismissal claim.

HR Excellence Partners provides hands-on performance management support for Australian SMEs — from drafting improvement plans and warning letters through to guiding you through a defensible termination process. Where a performance concern turns out to involve allegations of misconduct or a workplace complaint, we also provide independent workplace investigations to make sure the right process is followed from the outset.

The best place to start is our free HR Health Check, which reviews your current performance management approach against the Fair Work Act and identifies any gaps before they become a dispute. Use code HEPFREE at checkout to have the cost of your HR Health Check waived.

Book your free HR Health Check →

Vas Papadopoulos
Founder & Principal HR Consultant
HR Excellence Partners
vas@hrexcellencepartners.com.au
hrexcellencepartners.com.au
+61 432 244 744

References

1. Fair Work Act 2009 (Cth), s.387 — Criteria for considering harshness etc. — https://www.legislation.gov.au/Details/C2024C00622
2. Fair Work Commission, Capacity (Unfair dismissal benchbook) — https://www.fwc.gov.au/capacity
3. Fair Work Ombudsman, Unfair dismissal — https://www.fairwork.gov.au/ending-employment/unfair-dismissal
4. Fair Work Ombudsman, Ending employment fact sheet — https://www.fairwork.gov.au/tools-and-resources/fact-sheets/minimum-workplace-entitlements/ending-employment
5. Fair Work Ombudsman, Small Business Fair Dismissal Code and checklist — https://www.fairwork.gov.au/ending-employment/unfair-dismissal
6. Fair Work Ombudsman, High income threshold amounts — https://www.fairwork.gov.au/tools-and-resources/library/K600486_High-income-threshold-amounts
7. Fair Work Ombudsman, Award and agreement free wages and conditions — https://www.fairwork.gov.au/employment-conditions/awards/award-and-agreement-free-wages-and-conditions
8. Fair Work Ombudsman, National Employment Standards — https://www.fairwork.gov.au/employment-conditions/national-employment-standards
9. Fair Work Ombudsman, Dismissal — https://www.fairwork.gov.au/ending-employment/dismissal

This article is general information only and does not constitute legal advice. Entitlements, thresholds and legal requirements can change and should be confirmed against current Fair Work Ombudsman and Fair Work Commission guidance, or a qualified HR/workplace relations advisor for your specific circumstances.