15. Terminations Done Right - Avoid Legal Pitfalls

How to handle dismissals fairly, legally, and professionally.

Imagine this -  You’ve been having ongoing performance issues with an employee. You’ve had multiple conversations with them, but there’s been little improvement. Frustrated, you decide to let them go immediately. You assume a simple conversation and a final pay check will be enough.

A few weeks later, you receive a legal notice—the employee has filed a personal grievance claim for unjustified dismissal. They’re seeking compensation for lost wages, emotional distress, and legal costs. Suddenly, what seemed like a simple termination has turned into a costly and stressful legal battle.

For SME owners in New Zealand, terminating an employee isn’t as straightforward as it may seem. Unlike larger businesses with HR departments and legal teams, small business owners often lack guidance on employment law requirements.

Common termination mistakes include -

• Failing to follow due process – Even if the employee’s performance is poor, legal procedures must be followed.

• Not giving written warnings – Employees must be given opportunities to improve.

• Dismissing employees without valid reasons – Termination must be both fair and lawful.

The consequences? Costly legal claims, damage to business reputation, and potential fines. However, when done correctly, terminating employment can be handled professionally, legally, and fairly.

The Solution – A Legally Sound Approach to Employee Dismissals

Termination should always be a last resort, but when it becomes necessary, following the correct legal process is crucial. Here’s how SMEs can handle dismissals fairly and lawfully in New Zealand.

1. Understand the Legal Grounds for Dismissal

Under New Zealand employment law, employees can only be dismissed for fair and justified reasons. The most common legal grounds for termination include -

• Serious misconduct – Theft, fraud, violence, or breaches of company policies.

• Poor performance – Consistently failing to meet reasonable job expectations.

• Redundancy – When a role is no longer required due to restructuring.

• Incompatibility – Ongoing personality clashes that disrupt the workplace.

Employers must have clear, documented evidence to support the dismissal—a gut feeling is not enough.

2. Follow a Fair Disciplinary Process

For performance-related dismissals, SME owners must follow a fair and transparent disciplinary process. This includes -

• Identifying the issue – Clearly outlining concerns regarding performance or behaviour.

• Providing written warnings – Employees must receive at least one formal written warning before termination (unless the misconduct is serious).

• Giving the employee a chance to respond – They must be given a fair opportunity to explain or improve their behaviour.

• Holding a formal meeting – Where the employee can bring a support person and discuss their side of the situation.

Skipping these steps can result in unjustified dismissal claims, which often favour the employee.

3. Managing Redundancies Legally

If an employee is being dismissed due to redundancy, the employer must prove that -

• The role (not the person) is no longer needed.

• The decision was made for genuine business reasons (not personal issues).

• The process was fair and consultative—employees must be given a chance to provide feedback before redundancy is finalised.

Failure to follow proper redundancy procedures can lead to personal grievance claims, even if the business is struggling financially.

4. Provide the Correct Notice Period

Most employment agreements require a minimum notice period, which is usually -

• One to four weeks (depending on the contract).

• Immediate termination only for serious misconduct (e.g., theft, assault).

If an employer fails to provide the correct notice period, the employee may be entitled to compensation.

5. Issue a Final Pay and Required Documents

When an employee is terminated, they must receive -

• Final wages – Including outstanding leave entitlements and overtime pay.

• A termination letter – Outlining the reason for dismissal and notice period.

• KiwiSaver contributions and tax filings – All financial obligations must be met.

Not paying employees correctly upon termination can lead to legal disputes and reputational damage.

Reflective Scenario – What Would You Do?

You have an employee who has been consistently underperforming, despite multiple verbal warnings. You’re at the point where you need to let them go.

Using the strategies above, you might -

• Issue a formal written warning outlining specific performance concerns.

• Hold a structured meeting where they can respond to the concerns.

• Offer a final opportunity for improvement before proceeding with dismissal.

By following legal procedures, you protect your business while ensuring fairness to the employee.

Golden Nugget - "How you handle an employee’s exit is just as important as how you hire them."

Terminating employment is never easy, but following the correct legal process protects your business from costly legal battles and ensures a professional, fair approach. In New Zealand, doing it right isn’t just best practice—it’s the law.