Sexual harassment allegations are some of the most confronting issues a small business owner or manager can face.
They’re also some of the highest risk.
In the last few months we’ve had several of our small business clients reach out to us for support in responding to these types of matters. What’s been most striking isn’t the nature of the claims (they vary), but the range of employer responses.
While some businesses act quickly, respectfully and decisively, others (despite our encouragement/support!) are a bit more prone to delay, minimise, “wait and see”, or just hope it will quietly go away.
The latter approach concerns us greatly as, aside from the potential adverse impacts on the individuals involved, it potentially exposes the business and key decision-makers to significant risk.
This article highlights the considerable risks of a passive approach to such allegations. We also provide a few practical tips to help you respond appropriately if allegations are made.
A quick reality check: these allegations come in many forms
One of the reasons some employers get caught off guard is that they picture sexual harassment as a narrow set of behaviours, in a narrow set of circumstances.
In reality, we’ve supported clients with allegations arising from (for example):
- Interactions at work-related social settings (e.g. Christmas parties, end-of-year events, after-work drinks)
- Interactions between Directors/owners/senior leaders and workers (where power imbalance and fear of repercussions can be significant), and
- Interactions between workers of the same gender (don’t make the mistake of assuming that a single-gender workplace is “low risk”).
The common thread is this: regardless of who is involved or where it occurs, if it’s connected to work, the business can still be exposed, and your response matters.
Why your response matters as much as the allegation
Regardless of whether or not an allegation is ultimately substantiated, an employer can face serious consequences if they:
- Fail to take the complaint seriously
- Don’t act promptly
- Don’t provide procedural fairness
- Don’t take steps to protect the health and safety of workers
- Permit victimisation or retaliation through inaction, or otherwise handle the matter in a way that causes further harm.
In plain terms: you don’t get a free pass because the situation is uncomfortable, complex, or involves a high performer (or, dare we say it, a Director/senior manager of the business).
The legal and regulatory risk
1) Claims by the person who made the complaint
A worker who experiences sexual harassment has multiple pathways to take action beyond the business itself, including:
- Australian Human Rights Commission (AHRC) complaints under the Sex Discrimination Act 1984 (Cth)
- Anti-Discrimination NSW processes (and similar bodies in other states)
- Fair Work Commission processes (including disputes connected to dismissal or adverse action)
- Court proceedings seeking compensation (including for economic loss and psychological harm)
A key concept here is vicarious liability. Employers can potentially be held liable for sexual harassment by employees unless they can show they took “all reasonable steps” to prevent it.
That defence is much harder to rely on if your response is slow, inconsistent, or dismissive.
2) Claims by the person accused (if the process is mishandled)
Even where allegations are serious, the person accused still has rights. If you handle the process poorly, you may face claims such as:
- Unfair dismissal (if termination occurs without a fair process)
- General protections / adverse action claims (if they allege they were treated unlawfully)
- Defamation risk (if allegations are shared unnecessarily or carelessly)
This doesn’t mean you can’t take strong action. It means you need to take lawful, evidence-based action, supported by a fair and well-documented process.
3) Action by regulators and authorities (including WHS)
Sexual harassment is now firmly recognised as a work health and safety (WHS) risk.
In NSW, this means you should be thinking about SafeWork NSW and your duties under the WHS framework to provide a safe workplace and manage risks, including psychosocial risks.
Depending on the circumstances, regulator involvement can include:
- Complaints and investigations
- Improvement notices and compliance action
- Potential prosecutions in serious cases
There is also increasing focus at a federal level on the positive duty for employers to take proactive and reasonable steps to prevent and eliminate sexual harassment and related unlawful conduct. You can read more about this in our previous blog article, available HERE.
Case example: what can happen when it escalates
You don’t need to be a large corporate to end up in a legal process.
A recent Federal Court case (ref. Magar v Khan [2025] FCA 874 (Mad Mex franchise)) involved a 21-year-old employee who alleged sexual harassment by the franchise owner/sole director over a two-year period.
The concerns included the owner asking the young employee about her sex life, remarking upon characteristics of her body, showing her his sex toys and pornography, and suggesting they attend a massage parlour and watch pornography together. The Court ultimately accepted that the conduct amounted to sexual harassment.
What went wrong (and what employers should learn from it):
The decision highlights the risk where there is a power imbalance (young worker, small business owner, isolated work context), and complaints are not handled appropriately.
After the worker complained to People & Culture/HR, the owner threatened to take defamation action against the employee if she did not withdraw her complaints, which the Court found amounted to unlawful victimisation.
The case is also a reminder that these matters can continue even if the business structure changes (the employer entity was in liquidation and the proceedings continued against the individual as an officer).
Compensation ordered: the Court ordered the individual to pay $305,000 in damages, including general damages for sexual harassment, general damages for victimisation, aggravated damages, and compensation for past and future economic loss.
The takeaway isn’t that every complaint ends in court. It’s that when harassment is alleged, the consequences can be severe if the conduct is found to have occurred and/or the response is mishandled, minimised, and/or includes actions that could be seen as retaliatory.
Workers’ compensation and psychological injury: a very real exposure
When a complaint is ignored, minimised, or handled insensitively, the risk of psychological harm increases. Common flow-on impacts can include:
- Anxiety, depression, trauma symptoms
- Extended absences
- Reduced capacity to work
- Resignations (sometimes without notice)
This can lead to workers’ compensation claims for psychological injury, which can be costly in both direct premiums and indirect disruption.
And it’s not only the complainant who may be affected. Witnesses, managers, and even the person accused can experience psychological impacts if the workplace becomes hostile, polarised, or unsafe.
The “hidden costs” small businesses feel first
Legal risk is serious, but many small businesses feel the operational damage long before a claim is lodged or a lawyer’s letter arrives.
Team morale and trust
When staff believe management won’t act, trust erodes quickly.
People start asking:
- “Is this workplace safe?”
- “Do they only protect certain people?”
- “If it happened to me, would anyone take it seriously?”
Once that trust is gone, it’s hard to rebuild.
Productivity and performance
Unresolved harassment complaints create distraction and stress. People spend energy on avoiding certain colleagues, managing anxiety, and navigating rumours instead of doing their job.
Managers also get pulled into constant conflict management, which drains time from running the business.
Absenteeism and turnover
If someone feels unsafe or unsupported, they tend to take more sick leave, request changes to duties or rosters, or leave the business entirely.
Replacing staff is expensive, especially when you factor in recruitment time, onboarding, and lost productivity.
Reputation and recruitment
In a world of online reviews, social media, and tight industry networks, reputational damage can spread quickly.
A business that becomes known as a place that ignores complaints or tolerates poor or illegal behaviour will struggle to attract quality candidates, retain high performers, and win work with values-driven clients.
What “dragging your feet” can look like (and why it’s risky)
Most employers don’t set out to mishandle these matters. But common patterns we see include:
- Dismissing or minimising the complaint by, for example, merely asking the complainant to confront the other person directly, and not following through
- Waiting for “more evidence” before taking any steps
- Treating it as a personality clash or “he said/she said”
- Moving the complainant to another location/role and not addressing the behaviour
- Telling people to “keep it quiet” without addressing safety
- Allowing the alleged perpetrator to keep supervising or working closely with the complainant
Delays and half-measures can unintentionally signal that the business tolerates the behaviour.
So what do you to do if you receive a complaint or report?
Every situation is different, but a sound approach will generally include:
- Responding promptly and respectfully
- Acknowledge the report, thank the person for raising it, and explain next steps.
- Assessing immediate safety and wellbeing risks
- Consider interim measures (e.g., reporting line changes, separation, adjusted duties) without assuming guilt.
- Setting clear expectations about confidentiality
- You can’t always guarantee complete confidentiality, but you can limit who needs to know.
- Avoiding “off the record” problem-solving
- Informal chats can be appropriate in some situations, but serious allegations usually require a more formal pathway.
- Ensuring procedural fairness
- Give the person accused a chance to respond, and keep the process impartial.
- Undertaking an appropriate investigation
- Decide whether an internal or external investigation is appropriate based on seriousness, conflicts of interest, and capability.
- Note that if it’s a matter that could potentially result in a termination, we would usually suggest an external independent investigation be undertaken (we have several referral options available).
- Documenting all action and decisions
- If it isn’t documented, it’s very hard to defend your actions later.
- Taking proportionate action and following up
- Outcomes might include training, warnings, role changes, termination, or broader culture interventions.
- Preventing victimisation
- Make it clear throughout the process that retaliation is not tolerated, and monitor the workplace closely during and after the process.
A practical question for owners and managers
If a regulator, tribunal member, or judge were to consider your response to these types of allegations, could you confidently and comfortably show:
- What you did?
- When you did it?
- Why you did it?
- How you supported the people involved?
- How you ensured the workplace remained safe?
If the honest answer is “not really”, it’s time to tighten up your approach.
Need a hand?
If you’re dealing with a sexual harassment complaint, or you’re concerned that your policies and processes won’t stand up if and when tested, we can help.
At HR Success, we support small and medium businesses to respond promptly, sensitively and lawfully, including:
- Immediate response planning and risk management
- Supporting internal investigations, or sourcing independent external investigations
- Procedural fairness and documentation
- Manager guidance on difficult conversations
- Practical steps to help you meet your obligations as an employer
If you’d like to talk through your situation confidentially, get in touch. It’s much easier (and cheaper) to get the response right early than to try to repair the damage later.
Note that this is general information and a summary only. It is not formal or legal advice. Information is current and we believe accurate at the time of publication – 22/04/2026.
