A demotion is a reduction of an employee’s position or remuneration within an organisation because of the employee’s poor performance or in response to a change in business needs. Generally speaking, when an employee is notified of the demotion, they have the choice of either accepting the lower position or leaving the organisation altogether. However, in some cases, the employee can refuse a demotion, or even make a claim that the demotion is an unfair dismissal. This article looks at the legal ramifications of demotion in the Australian workplace through case studies.
What is demotion?
A demotion is a detrimental change to a worker’s employment that reduces their duties, responsibilities, or salary. Typically, in Australia, a demotion is only possible through the termination of an employee’s current contract and the creation of a new employment contract.
Is it legal?
A demotion may be legal if such a change is provided for in the employment contract, modern award, or enterprise agreement. An employment contract or enterprise agreement sets the terms of the employment relationship and can allow for demotion in specific circumstances. If these terms allow for demotion without termination, the demotion does not constitute unfair dismissal regardless of how significant the reduction in duties or remuneration.
What are valid reasons for demotion?
An employee can be validly demoted based on misconduct. For instance, if a supervisor is found to have acted inappropriately with subordinates, he or she may be removed from their position of authority over other staff but remain employed at a lower level. Alternatively, a demotion might result from a genuine redundancy situation. For instance, if the company is being restructured or there is a merger or change in ownership, an employee’s role may no longer be needed. In such cases, employers must offer affected employees available alternative employment, even if it is a lower level or salary. In that case, an employee might accept a demotion to a lower position to stay on staff or choose to accept a redundancy for their substantive position.
Do I have to accept a demotion?
An employer has the option to either accept the demotion or leave the organisation. Generally speaking, if an employee freely accepts a demotion, then they cannot later claim that the demotion was in fact an unfair dismissal and make a claim. However, if the worker remained employed in the demoted role through financial desperation or under protest, it may be possible for them to make a claim on the basis that this was a dismissal.
When is it unfair dismissal?
Under the Fair Work Act 2009, a demotion only amounts to dismissal if it significantly reduces the worker’s duties or remuneration. The word “significant” is not defined in the Act, so the Fair Work Commission (FWA) uses the ordinary meaning of the word, being that the change is “a noticeably or measurably large amount”. On that basis, the demotion would need to involve an objectively large reduction in pay or duties to constitute a dismissal.
When a worker does not consent to a demotion and is terminated as a result, they may be able to make an unfair dismissal claim to the FWA. An employee can only make such a claim when they:
- were employed by their current employer for at least 6 months (or 12 months for smaller businesses);
- were covered by a modern award, enterprise agreement or earned less than the statutory high-income threshold; and
- file a claim within 21 days of termination.
Possible outcomes
If the FWA finds that the demotion was an unfair dismissal, it can order the employer to reinstate the employee to a similar position to their pre-demotion role. In that case, the FWA might order the employer to cover the employee’s wages from termination to reinstatement. When reinstatement is impossible in the circumstances, the FWA may order the employer to pay compensation.
Case study: demotion as unfair dismissal
In Angela Johnson v Zehut Pty Ltd [2014], the FWC heard from an employee who worked as a National Sales Manager and National Operations Manager for the same clothing retailer for more than a decade. When she was asked to take over management of a struggling retail store, she agreed on the condition that she kept her current salary package. Subsequently, the company tried to change the terms of her employment to reduce her annual wage by $30,000. When the employee declined to accept this demotion, the company accepted her refusal as a resignation. When the employee sued for unfair dismissal, the FWC concluded that her employment had been effectively terminated without valid cause. The FWC ultimately found the dismissal was harsh, unfair and unreasonable.
Case study: demotion not unfair dismissal
In Williams v Valley Healthcare Group Pty Ltd [2023], the FWC considered whether changes to an employee’s reporting line and duties amounted to a demotion and a constructive dismissal. At the time of the alleged demotion, the employee was employed as an HR Manager, reporting to the Managing Director and Owner. In September 2022, she was advised that her role was changing so that she no longer needed to be the HR Manager for a particular business section, would no longer deal with recruitment, and would now report to the General Manager. The employer maintained that this modification was part of a succession plan and organisational restructure. The employer also claimed that the employee’s role in the recruitment team had been a trial that ended after complaints about the employee’s management style and inexperience in recruitment.
The employee made a formal complaint in response to this change in her employment, alleging that she had not been consulted on a significant change to her role. The employee then resigned, citing constructive dismissal on the basis of a repudiatory breach of her employment contract. The FWC disagreed, finding that the employee resigned voluntarily and her “demotion” was not a constructive dismissal. In summary, the FWC found that the employee complained about her workload, prompting the director to reconsider the workload that had been assigned to the employee on a trial basis. In fact, the FWC considered that the director would be negligent if he had not addressed her complaints to alleviate her workload. Further, the FWC found the employee was not demoted, as her title was unchanged and there was no reduction in salary or work hours. The change in the reporting line was not a constructive dismissal but was caused by changes at the senior level. While it was found that the director could have handled the situation better by consulting with the employee before making the change, the FWC pointed out that the employee had a habit of challenging and criticising the director and was unlikely to accept the change however it was presented. The FWC dismissed the unfair dismissal application.
Taylor Rose can answer any questions you have about the legal implications of demotion and employment law in Australia. Please get in touch with our experienced solicitors on 1800 491 469.
