Published: April 2026
Roughly 30 to 40 per cent of Australian employees have had a workplace relationship at some point. In small teams of 5 to 15 people, the rate is likely higher due to proximity and shared social time. The issue is not that relationships happen. The issue is what happens when they end, when there is a power imbalance, or when the business has no policy to manage the situation.
For Australian SME owners, the cost of a workplace relationship that goes wrong is not theoretical. It is quantifiable: $40,000 to $80,000 for an unfair dismissal settlement, uncapped compensation for sexual harassment claims, and $50,000 to $200,000 or more in indirect costs including lost productivity, replacement hiring, and management time. And since December 2022, the positive duty amendments to the Sex Discrimination Act mean you can be liable even if you did not know about the conduct.
Australian workplace surveys consistently show that approximately one in three employees has been in a romantic relationship with a colleague. In small businesses where people work closely together, share social time, and often see each other more than their own families, workplace relationships are virtually inevitable.
Most workplace relationships are between peers and cause no issues. They start, they either continue or end, and the business is unaffected. The problems arise in three specific scenarios: when there is a power imbalance (manager and direct report), when a relationship ends badly and the working dynamic becomes toxic, or when the business has no framework for managing disclosure, conflict of interest, or post-relationship working arrangements.
Unfair dismissal claims: the average settlement range is $40,000 to $80,000. These arise when one party in a relationship leaves the business (voluntarily or otherwise) and claims the departure was connected to the relationship or its aftermath. Even if the dismissal was for performance reasons, the relationship history creates an argument that the real motivation was personal.
General protections claims under the Fair Work Act: these are uncapped. If an employee can demonstrate that adverse action (dismissal, demotion, reduced hours) was taken because of a protected attribute or because they exercised a workplace right (such as making a complaint about harassment), compensation can reach six figures.
Sexual harassment claims under the Sex Discrimination Act: also uncapped. The Australian Human Rights Commission (AHRC) has overseen settlements in recent years well into six figures. Under the positive duty provisions that took effect in December 2022, the AHRC can investigate proactively without waiting for a complaint.
Lost productivity during workplace drama: when a relationship breaks down in a small team, everyone feels it. The tension, the side-taking, the awkward meetings. Research and workplace experience suggest a 10 to 20 per cent productivity reduction across the entire team for 2 to 6 months.
Worked example: A 12-person team averaging $85,000 salary. A relationship breakdown creates 3 months of workplace tension. A conservative 15 per cent productivity loss across the team: $38,250 in effective wages paid for sub-par output. If the tension persists for 6 months: $76,500. See our absenteeism and presenteeism statistics for more data on how workplace disruptions affect productivity.
Replacement cost if one or both parties leave: $15,000 to $40,000 per person including recruitment agency fees, lost productivity during the vacancy, and onboarding time for the replacement. If both leave, that is $30,000 to $80,000 in replacement costs alone. See our turnover cost calculator and turnover statistics for the full picture.
Management time: 50 to 100 or more hours of owner or manager time dealing with the situation. Conversations with each party, HR advice, legal consultation, restructuring teams, managing the fallout. At an owner's effective hourly rate of $150, that is $7,500 to $15,000 in opportunity cost.
Potential loss of clients or projects during the disruption period. This is harder to quantify but very real in client-facing businesses where team cohesion directly affects service delivery.
The Sex Discrimination Act amendments that took effect in December 2022 introduced a positive duty on employers to take reasonable and proportionate measures to eliminate sex discrimination, sexual harassment, and hostile work environments. This is a fundamental shift from the previous framework, which was reactive (respond when a complaint is made) to proactive (take steps to prevent it before it happens).
What this means for SME owners: you can be liable even if you did not know about the conduct, if you should have known and would have known had you taken reasonable steps. No policy plus no disclosure framework plus no training equals a compliance gap that the AHRC can investigate and act on without waiting for a complaint.
This is not hypothetical. The AHRC has been actively using these powers since 2023. SMEs are not exempt. A 10-person business has the same positive duty obligations as a 10,000-person corporation, adjusted for what is "reasonable and proportionate" given the size and resources of the business.
A relationship between someone with authority (owner, director, manager) and someone who reports to them. This creates an inherent conflict of interest in performance reviews, pay decisions, promotion, disciplinary matters, and work allocation. Even if the relationship is genuinely consensual and the manager acts with complete objectivity, the perception of favouritism undermines team morale and trust.
If the relationship ends and the junior party makes a complaint, the power imbalance makes defence extremely difficult. The question is not "was there consent?" but "could there be free and equal consent given the power differential?" In a small business where the owner is one party, this question is almost impossible to answer favourably.
This is the scenario that destroys small businesses. Not because the relationship is wrong, but because the business has no framework to manage the conflict of interest, and when things go wrong, the legal and financial consequences are catastrophic relative to the size of the business.
A workplace relationships policy does not need to be heavy-handed or patronising. It needs to be clear, practical, and communicated to every employee.
Disclosure requirements: when a relationship develops between colleagues, both parties should disclose to a nominated person (usually the owner or a senior manager). The disclosure is not about permission. It is about managing potential conflicts of interest before they become problems.
Conflict of interest management: when one party has authority over the other (directly or indirectly), the reporting line must be adjusted. Performance reviews, pay decisions, and disciplinary matters involving the junior party must be handled by someone else.
Confidentiality protections: the disclosure should be handled with discretion. Only the people who need to know (for the purpose of managing the conflict of interest) should be informed.
Post-relationship arrangements: if the relationship ends, both parties should be able to continue working without undue difficulty. The policy should address how ongoing working arrangements will be managed, including the option to adjust teams or reporting lines if needed.
Clear statement of purpose: the policy exists to protect everyone involved, not to punish anyone for having a personal life. Frame it that way. Communicate it during onboarding and review it annually.
The comparison is stark.
Prevention: HR policy review and update ($500 to $2,000), staff training on workplace behaviour and the positive duty ($1,000 to $3,000 for a small team session). Total prevention investment: $1,500 to $5,000.
Cleanup: average unfair dismissal settlement ($40,000 to $80,000), plus lost productivity ($38,000 to $76,000), plus replacement hiring ($15,000 to $40,000 per person), plus management time ($7,500 to $15,000), plus potential AHRC investigation costs ($10,000 to $30,000 in legal representation). Total cleanup cost: $110,500 to $241,000 or more.
Prevention costs 1 to 3 per cent of what cleanup costs. And unlike cleanup, prevention actually works. A clear policy, communicated well, prevents the vast majority of workplace relationship issues from escalating into legal and financial problems.
Use our recruitment fees calculator to model the replacement cost for key roles, and see our cost of a bad hire analysis for what happens when you need to hire under pressure after an unplanned departure.
No. You cannot legally prohibit personal relationships between employees. What you can do is require disclosure when a relationship creates a potential conflict of interest, and implement reasonable measures to manage that conflict. A blanket ban would likely be unenforceable and could expose you to discrimination claims if you attempted to enforce it selectively.
Since December 2022, employers must take reasonable and proportionate measures to prevent sex discrimination and sexual harassment. This is a proactive obligation, not just a reactive one. You cannot wait for a complaint. You must have policies, training, and processes in place to prevent these issues. The AHRC can investigate and take enforcement action even if no complaint has been made.
Unfair dismissal settlements average $40,000 to $80,000. Sexual harassment claims under the Sex Discrimination Act are uncapped and can reach six figures in compensation alone. Add legal costs ($20,000 to $50,000 for representation), management time, and productivity loss, and a single claim can cost a small business $100,000 to $250,000 or more.
Yes. The positive duty applies to all employers regardless of size. What constitutes "reasonable and proportionate" measures scales with the size of the business, but having no policy at all is difficult to defend in any size organisation. For a 5-person business, the policy can be brief and straightforward, and the training can be a 30-minute team discussion.
Thank them for the disclosure. Review whether there is a conflict of interest (particularly if one person has authority over the other). If there is, adjust reporting lines or decision-making responsibilities. Document the disclosure and the steps taken. Keep it confidential. Do not make judgments about the relationship itself. Your only concern is managing the business impact.
Potentially, yes. Under the Sex Discrimination Act, a person who aids, permits, or authorises discriminatory conduct can be personally liable. If you knew about a situation that created a risk of harassment and did nothing, you could be held personally responsible alongside the company. Director penalties extend beyond tax and super, and workplace safety obligations are an increasingly active area of personal liability for SME directors.
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We review and check this guide periodically. At the time of writing (April 2026), all pricing and regulatory information was current. Some details may change over time as ATO requirements and market rates evolve.
Scale Suite is a Sydney-based provider of outsourced finance and HR services for Australian SMEs. We deliver bookkeeping, financial reporting, payroll processing, fractional CFO support, recruitment, employee onboarding, people and culture support, and fractional HR oversight, all as a fully embedded team that works inside your business.
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