The federal Coalition is considering softening a key plank of its workplace relations policy, limiting the exemption from unfair dismissal laws to businesses with five workers or fewer.

Tony Abbott has previously flagged exempting businesses with up to 20 employees from the laws, prompting attacks from Labor and the unions that millions of workers would lose protection.

But senior Coalition sources told The Australian a new plan to restrict the exemption to so-called micro-businesses of up to five full-time equivalent employees was now under "active consideration" by the federal opposition.

It is understood the revised plan is an attempt to neutralise industrial relations as a political negative in the lead-up to this year's federal election, while appeasing the Coalition's core small business constituency.

As part of the compromise, the Coalition would extend the application of Labor's Fair Dismissal Code to businesses with up to 20 employees instead of the current limit of 15.

The Coalition proposal contrasts sharply with the position under Work Choices, which removed unfair dismissal protections from people working in companies with 100 or fewer employees.

Under Labor's Fair Work Act, employees must have worked for 12 months before they can make a claim if they are employed by a small business with fewer than 15 employees. This category of employee is also subject to the Fair Dismissal Code.

Coalition sources stressed while the revised plan was favoured by key opposition figures, it was yet to be endorsed. Sources said members of the opposition and the business community wanted Mr Abbott to proceed with the blanket exemption applying to up to 20 employees.