Small and medium businesses are among a growing number of employers being swamped by AI-assisted unfair dismissal claims, as a skyrocketing number of applications prompts the Fair Work Commission to issue new guidelines to stamp out AI slop.

The Commission’s workload has ballooned by 70 per cent in the past three years, with employees using artificial intelligence to produce thousands of applications that are clogging the system but have limited merit. It has blamed the spike almost entirely on AI, observing it can’t be explained by any other forces within the labour market.

As a litigation specialist from PCL Lawyers, Roland Müller has witnessed the trend firsthand, defending SME owners against poorly-founded claims. But he says AI is just one part of a broader challenge for small businesses facing Fair Work claims. The bigger issue, he argues, is what happens before a claim is ever lodged. Instead of seeking help early or keeping on top of documentation, the demands of running a small business often mean employment matters are dealt with reactively rather than proactively.

“Prevention is far cheaper than cure,” he says. “Doing it properly in the first place can save 10 or 20 times as much as you’d pay for advice, if you can prevent something going wrong.”

The Late Call Small Business Owners Make to Their Lawyer

Müller sees a recurring emotion in clients hit with FWC claims. “A lot come with a mindset of frustration,” he observes, and many take it personally. “They often say it’s quite unfair to be taken to the Fair Work Commission when they feel they’ve not done anything wrong and the employee might have been the problem,” Müller explains. Some clients acknowledge they could have handled things differently, but take issue with misrepresentations and hallucinations found in many AI-generated applications.

The ambiguity Müller sees in many applications perhaps explains why AI is so quick to assure employees they have a case. “Often, it’s a situation where the employer hasn’t done anything really wrong but the way it’s been done or communicated has left them open to an applicant running the argument,” he explains. “The problem is once you’re in the Fair Work Commission, it distracts you from running your business. And whether you win or lose, you’re still spending that time, effort and money.”

There’s no typical profile of a business owner who ends up in the FWC, Müller says, but the majority are very busy, with their focus stretched thin. “They might not have paid attention to their employment contracts for some years. They might not have dedicated human resources support,” he explains. “They’re usually quite capable people who know what they’re doing in their business, but they might not have worried about getting some advice before taking a step that is now in question.”

Indeed, he says by the time owners pick up the phone to call him, the situation has already escalated. “They come to me once they’ve received documents or they are in the final stages of terminating someone’s employment,” he says. “It often arises quite late.”

The DIY Advice Trap And A Common Blind Spot

Before seeking advice, Müller notes that some small and medium business owners make two mistakes. One is DIY legal advice, courtesy of AI models. “Gen-AI gets me a lot of work because it gets a lot of people into trouble,” Müller says.

He says employers can be as quick as employees to embrace chatbot results that skew their way. “They’ll look things up online and assume it’s applicable rather than getting specific advice for their situation, and sometimes that means the opportunity to do things properly and avoid the problem is lost,” he notes.

Others have some knowledge of the law but are tripped up by less well-known provisions. For example, they may protect themselves against unfair dismissal action but overlook the risk of a general protections claim, which prevents adverse action against employees for protected reasons like pregnancy, disability or making a complaint.

“If nobody helps them see the bigger picture, they’ll follow a process that’s not necessarily the right process,” he explains. “They’ll get themselves into trouble in a different way. So, it’s worth stepping back and seeing the whole picture that is sometimes missing.”

The Three Flashpoints Across the Employment Lifecycle

Certain stages of the employment life cycle leave SMEs particularly exposed to Fair Work Commission claims, beginning with the recruitment phase. “Hiring well can be good prevention,” says Müller, noting that mistakes are common while navigating a system involving more than 120 modern awards. The FWC itself acknowledges the complexity of the workplace relations system, reporting its Employer Advisory Service had issued 10,000 pieces of written advice in its first four years of operation.

“If you underclassify someone and they should be paid at a higher rate, then that’s a really good way to find yourself at the Fair Work Commission or in court, sometimes months or years down the track,” he says.

Performance management can also be a source of contention. If employees are not managed according to clear processes, that can serve as evidence should the employee lodge a claim. But the greatest flashpoint occurs during termination. “That is when all of those things that may have been latent problems in the employment relationship come to a head, and that’s probably peak season for employers getting in trouble,” Müller says.

Small business owners occasionally ask him to help set the groundwork for a termination, but he says by then the decision is often long overdue. “You can tell pretty early on if someone’s not going to work out, and that’s why we often have probationary periods,” he says, observing that too few employers take advantage of this timeframe, in which it’s easier to terminate employment. “If an employee’s not able in the first six months to show that they’re suitable for the job, is giving more time going to help or is it simply going to make it more difficult down the track? It seems really unkind to be quick to fire, but sometimes it’s better for both parties to bring things to a head early.”

He recommends seeking help from an employment lawyer, an HR advisory service or from the Fair Work Commission itself. “That is a much more reliable source than a general Google search or gen-AI,” he says.

Building the Defence Before Anyone Files a Claim

Whether an application is produced via AI or by a professional, Müller says an employer’s best defence comes from dotting i’s and crossing t’s throughout the employment lifecycle. He implores business owners to incorporate legal check-ups into their annual business reviews as ‘good business hygiene.’

“People every year might check how my debt is going? Have people been paying their invoices? You might review contracts with suppliers or credit terms to make sure they’re compliant. Do the same thing with your employment documents,” Müller recommends. “If you’re not doing it at least once a year, you’re leaving yourself open to risk as employment obligations can move quickly.”

Documents and policies must be not only up-to-date but actually followed. “That’s often the main argument from employees,” he explains. “They say, ‘Hey, you said there’s this procedure, but you didn’t follow it as an employer and so that’s really unfair. I thought I was playing by these rules and you say, no, we’re not doing that now.’” Such inconsistencies can cause employers to lose leverage in a FWC hearing. “If you say you do it one way and then do it differently, that’s when there’s a large gap that you can fall through,” he adds.

Senior Legal Counsel and Head of HR Advisory at Employment Hero Simon Obee says reducing reliance on manual admin may make it easier for small businesses to keep on top of their employment obligations. “Effective use of technology can help employers remain compliant by automatically issuing employees with documentation, triggering alerts and workflows when incidents occur and interpreting pay obligations under modern awards that reduce the chance of human error,” he says.

Businesses Are Increasingly Likely To Fight Rather Than Settle

FWC claims are, historically, likely to settle, with three out of four unfair dismissal matters resolved with conciliation. The amount of money changing hands is modest: 61 per cent of cases settle for less than $10,000, with the median between $4,000-6,000. But Müller observes a trend in which employers are becoming increasingly reluctant to settle if they believe their case is winnable.

“They’re taking a much more careful look at some of this, because as AI slop makes its way into claims, a lot of this stuff doesn’t withstand scrutiny,” he says. “You need somebody competent to look at it early, to decide what to do. If it’s a claim that has merit, and the employer’s done something wrong, then it’s good to resolve that early before everyone spends a lot of time and money. But if it’s nonsense and you’re always going to defeat the claim, a lot more employers are now willing to have the fight.”

Some SME owners fear settling may set an unwanted precedent. “So, employers are now taking a bit of a stand against the rubbish claims, and they’re settling the ones that ought to be settled, where it’s fair or it makes commercial sense.”

He stresses there is no one-size-fits-all approach and all business owners need to make decisions based on the best information available. “I think that’s an important takeaway: knowledge is still power,” he says. “Know what you’re doing, know what you’re facing and know what the strategy is.”