How the unfair dismissal compensation cap works in Australia

If you employ staff in Australia, a dismissal that goes wrong can finish in the Fair Work Commission with an order to pay compensation. Most employers know that outcome is possible, but fewer understand the dollar figure the Commission can actually order. That figure is controlled by a statutory limit: the unfair dismissal cap.

The cap serves two purposes. It compensates an employee for genuine economic loss caused by an unfair dismissal, and it stops that compensation from becoming an open-ended bill for the employer. Under s 392 of the Fair Work Act 2009 (Cth), the Commission cannot order compensation above the lesser of two amounts: 26 weeks of the employee's remuneration, or half the high income threshold at the time of the dismissal. Because the threshold is reviewed every year, the ceiling moves each 1 July. This guide explains how the cap actually works: who can bring a claim, how the Commission arrives at a figure, where the cap bites in practice, and the traps that catch employers out.

The players and what each does

An unfair dismissal claim brings together three actors with different jobs:

The employer: decides whether to dismiss and, if a claim is made, must defend the decision by showing a valid reason and a fair process.
The employee: must lodge an application within 21 days and persuade the Commission the dismissal was harsh, unjust or unreasonable.
The Fair Work Commission: decides whether the dismissal was unfair and, if so, orders the remedy, which is reinstatement or compensation capped as set out in s 392.

Two other actors appear around the edges. The Fair Work Ombudsman can be involved where the claim overlaps with underpayment issues, and the Federal Court or Federal Circuit and Family Court deal with general protections claims, which work differently and are discussed below.

When the scheme is triggered: who is protected

The cap only matters if the employee can bring an unfair dismissal claim at all. Under s 382 of the Fair Work Act 2009 (Cth), an employee is protected from unfair dismissal only if two things are true.

First, the employee must have completed the minimum employment period: six months with a non-small business, or 12 months where the employer is a small business (s 383). A small business employer is one that employs fewer than 15 employees, counting regular casuals and treating associated entities as one (s 23).

Second, one of the following must apply: a modern award covers the employee, an enterprise agreement applies to the employment, or the employee's earnings are below the high income threshold (s 382(b)). An employee above the threshold with no award or enterprise agreement coverage cannot bring an unfair dismissal claim at all, so the cap never comes into play for them.

On top of eligibility, timing matters. An application must be made within 21 days after the dismissal takes effect (s 394(2)). The Commission can allow more time only in exceptional circumstances, weighing factors such as the reason for the delay and any prejudice to the employer (s 394(3)).

Finally, the dismissal itself must be unfair. Under s 385, the dismissal must be harsh, unjust or unreasonable, not consistent with the Small Business Fair Dismissal Code, and not a case of genuine redundancy. In deciding harshness, the Commission must consider the criteria in s 387: whether there was a valid reason related to capacity or conduct, whether the employee was notified of that reason and given an opportunity to respond, whether a support person was unreasonably refused, whether performance concerns were raised before the dismissal, and the size and resources of the employer's enterprise.

Reinstatement first, compensation second

It is easy to think of unfair dismissal as a money claim, but compensation is not the default remedy. Under s 390(3), the Commission must not order compensation unless it is satisfied that reinstatement is inappropriate and that compensation is appropriate in all the circumstances. Where the employment relationship can still function, the Commission can order reinstatement with continuity of service, which brings its own costs: back pay, preserved entitlements and a returning employee. The cap therefore governs the compensation path, not the reinstatement path.

The cap itself: 26 weeks' pay or half the threshold

The compensation cap is set out in s 392(5): the amount ordered must not exceed the lesser of the amount worked out under s 392(6), and half the high income threshold immediately before the dismissal.

The first limb is often summarised as 26 weeks of the employee's remuneration. More precisely, s 392(6) uses the total remuneration the employee received, or was entitled to, during the 26 weeks immediately before the dismissal, whichever is higher. If the employee was on leave without pay or without full pay during part of that period, an amount is added in accordance with the regulations. Taking the higher of the received or entitled figure means the cap is not depressed by an unusually quiet period in the lead-up to the dismissal.

The second limb tracks the high income threshold, which is prescribed by regulation and adjusted each 1 July. The high income threshold is currently $190,100 for dismissals from 1 July 2026, up from $183,100 for dismissals on or before 30 June 2026. Half of the current threshold is $95,050, and that is the most the Commission can order for a dismissal taking effect now.

Because the threshold is adjusted each year, the cap moves with it. A dismissal in June 2026 was capped at $91,550; the same dismissal in July 2026 is capped at $95,050.

How the Commission arrives at a figure before the cap

Before the cap is applied, the Commission works out what the employee actually lost. The method, which the Commission commonly describes as the Sprigg formula after Sprigg v Paul's Licensed Festival Supermarket, tracks the criteria in s 392(2). In practice the steps are:

Lost remuneration: the remuneration the employee would have received, or would have been likely to receive, if they had not been dismissed (s 392(2)(c)), usually measured to a reasonable re-employment date.
Less mitigation: any remuneration earned from other work between the dismissal and the order (s 392(2)(e)), and income reasonably likely to be earned before payment (s 392(2)(f)).
Contingencies and other matters: the Commission may adjust the figure for contingencies, such as the chance the employment would have ended anyway for a valid reason, under the catch-all in s 392(2)(g).
Length of service and viability: the employee's length of service (s 392(2)(b)) and the effect of the order on the viability of the employer's enterprise (s 392(2)(a)) are taken into account.
Misconduct: if the employee's misconduct contributed to the dismissal, the amount must be reduced by an appropriate amount (s 392(3)).
No compensation for hurt feelings: the order must not include any component for shock, distress, humiliation or other analogous hurt caused by the manner of dismissal (s 392(4)). The cap and the formula both deal in economic loss, not bruised feelings.
Payments already made: amounts paid at termination, such as payment in lieu of notice or redundancy pay, are accounted for so the employee is not compensated twice for the same loss.

Only after this assessment does the cap come in. If the calculated figure exceeds the lesser of the two limbs, it is reduced to the cap. Compensation is usually assessed on an after-tax basis because the aim is to restore the employee's net economic position, and the treatment of items such as superannuation can vary with the circumstances.

Where the cap bites: two worked examples

The two limbs of the cap matter in different situations. The examples below use the current half-threshold figure of $95,050 and assume the employee had served well beyond the minimum employment period:

Scenario A — the 26-week limb applies: An employee earns $1,800 per week. After deductions for post-dismissal earnings and adjustments, the Commission calculates $70,000 in economic loss. The 26-week figure is $46,800 ($1,800 x 26), which is less than $95,050, so the cap is $46,800. Even though the loss was calculated at $70,000, the order cannot exceed $46,800.
Scenario B — the half-threshold limb applies: An employee earns $4,500 per week. The calculated loss is $120,000. The 26-week figure is $117,000 ($4,500 x 26), but half the high income threshold is $95,050, which is lower. The cap locks compensation at $95,050.

In both scenarios the Commission still works through the deductions first, including post-dismissal earnings, contributions by the employee and payments already made, and only then applies the cap.

Edge cases and traps

Several situations change the exposure in ways that commonly catch employers out:

Small business employers: if you employ fewer than 15 employees, the minimum employment period is 12 months rather than six, and a dismissal consistent with the Small Business Fair Dismissal Code is not unfair at all (ss 385(c) and 388). The Code requires a valid reason, notification, an opportunity to respond, and documented steps, so small businesses that follow it can sit outside the scheme entirely.
High earners: employees above the high income threshold who are not covered by an award or enterprise agreement have no unfair dismissal protection, so no cap applies because no claim can be made. Their protection, if any, lies elsewhere, for example in a contract claim or a general protections claim.
General protections claims have no equivalent cap: a dismissal can also be challenged as adverse action under the general protections provisions. Those claims are heard by a court, not the Commission, and the court may make any order it considers appropriate, including compensation for loss suffered because of the contravention (s 545). There is no statutory cap of the kind in s 392, and the strategic stakes can be very different.
Superannuation and tax: the Commission's focus is economic loss from wages. Whether superannuation forms part of the loss, and how tax applies to the order, can vary with the facts, so the arithmetic is worth checking with a lawyer before relying on a number.
Payment in lieu of notice: amounts already paid at termination are taken into account, so paying out notice does not add on top of a later compensation order; it reduces the loss the employee can claim.
Fixed-term contracts: a fixed-term employee can still be protected from unfair dismissal, and there are rules that limit how consecutive fixed-term contracts can be used. Treating contract form as a shield without checking those rules is a common mistake.

Where a lawyer helps

The cap is most useful before anything goes wrong, because it lets you price the risk of a dismissal decision.

Before dismissing, a lawyer can confirm whether the employee is protected at all, whether the process to date satisfies s 387, and what a realistic compensation figure would be if the dismissal were found unfair. That assessment feeds directly into the decision: manage performance further, negotiate a mutual exit with a deed of release, or proceed.

If a claim lands, timing is tight. A lawyer can assess the application against the eligibility rules, prepare the response, and assemble the records that show a fair process. If the matter reaches a hearing, compensation arithmetic becomes the battleground: the lost remuneration period, mitigation evidence, contingencies and the application of the cap. Because most claims settle, the same analysis drives negotiation, and any settlement should be documented in a deed with proper releases.

The cap limits the order, not the risk

The cap is a real protection: for a dismissal taking effect today, the Commission cannot order more than $95,050 in compensation. But that ceiling covers only the compensation order. It does nothing about reinstatement, which the Commission prefers where it is workable, about the time and cost of defending a claim, or about claims that sit outside the scheme, such as general protections claims with court-ordered compensation. The mistake that costs employers most is treating the cap as a licence to skip fair process. The question worth asking before any dismissal is not what the cap allows, but whether your reason, your process and your records would survive the s 387 analysis and the scrutiny that follows a claim. Getting that checked early is usually far less expensive than defending a claim, and a consultation can tell you which side of the line you are on.