Understanding how the fair work commission calculates compensation for an unfair dismissal is handy to know. When you’re weighing up whether to dismiss someone it’s good to consider how much they could be awarded if they make a claim.

Is it better to deal with a disruptive employee? Or is it better to deal with a potential unfair dismissal claim?

Ofcourse, it is also handy to consider the three steps to avoid an unfair dismissal claim in the first place.

Reinstating a redundant employee

The first thing to keep in mind is that the Commission can only award compensation if it considers reinstatement to be inappropriate. However, it’s not common for the Commission to order reinstatement and the remedy in most cases is compensation.

The maximum compensation amount that can be awarded is the lower of:

➡ half of the employee’s annual wage OR

➡ the compensation cap, which is $91,550 for 2025–26 and changes on 1 July each year.

However, less than 0.4% of applicants receive the maximum amount. The median compensation amount is between 5 – 7 weeks’ pay.

What can compensation be awarded for?

An order for compensation is primarily designed to compensate someone for income they lose as a result of being unfairly dismissed.

The Commission can’t order compensation for shock, distress, hurt or humiliation caused by the dismissal.

Calculating unfair dismissal compensation

The first thing the Fair Work Commission considers is how long the employee would likely have remained employed had they not been dismissed. Often it will be indefinite, but sometimes not. For instance, if there were performance or behavioural issues that would have resulted in dismissal, or the employee was going to resign anyway, these could limit the amount of compensation payable.

The Commission will deduct any income the employee has earned since the dismissal. If they find another job on equal or better pay, they would only get compensation up to the point that they start the new job. If they start a new job on less pay, they could get compensation for the pay difference for a period of time.

The Commission must also take into account efforts by the person to find a new job. The person needs to make reasonable efforts, which means deliberate, positive steps to find a new job. If they don’t, their compensation could be reduced accordingly.

If the employee has been receiving workers compensation those payments will be deducted. However, income support payments, like Newstart Allowance, won’t be.

If misconduct by the employee contributed to the decision to dismiss them, the Commission must reduce the compensation amount by an appropriate amount on account of the misconduct.

The examples below explain how the maximum compensation amount is worked out.

An example of calculating an unfair dismissal claim compensation

Our team looked at a fictional person named Daisy who earned $50,000 per year before she was dismissed by her employer.

Half of Daisy’s annual salary is $25,000. The compensation cap for 2025–26 is $91,550.

Because the lower of these two amounts applies, Daisy’s compensation cap is $25,000.

What we see In most cases is employees receiving less than the maximum possible amount. For Daisy, the Commission determines that fair compensation is 6 weeks’ pay, which equals $5,770. Since this amount is below his $25,000 cap, the Commission orders the employer to pay Daisy $5,770.

Conclusion

Compensation awarded in unfair dismissal claims has its limits, so the amounts don’t tend to be high. Always be fair. But it can be better to deal with an unfair dismissal claim than an employee who is creating internal issues.

Also, keep in mind that general protections claims work differently. There is no compensation cap and the types of compensation available are much wider.