Demotion is a frequently misunderstood area of law, particularly when used as a disciplinary measure, and may result in legal claims if not managed correctly. Employers may be unaware that if a demotion involves a significant reduction in duties or remuneration, it can constitute a ‘dismissal’, even if the demoted worker remains employed by the employer.
What is a demotion?
Demotion typically involves changing an employee’s role to one with less responsibility, a lower title, or reduced pay. It is commonly used:
- to address performance concerns- when an employee consistently underperforms despite performance management and other support.
- as a disciplinary measure- as a consequence for misconduct instead of dismissal.
- as part of an organisational restructure- normally due to cost-saving or other efficiencies.
- in response to an employee request- where an employee requests to step down/reduce their responsibilities, perhaps for work-life balance or health reasons.
Whatever the reason, it’s important to handle demotions transparently and fairly.
When is it allowed?
Generally, an employer will need the employee’s consent for the demotion to be lawful, unless it is expressly authorised by an employment contract, modern award, or enterprise agreement.
For example, an enterprise agreement may include a clause that states disciplinary action can include ‘a reduction of the employee’s salary or demotion to a lower position or grade’. In this case, a demotion would constitute disciplinary action, and not a dismissal.
When does demotion constitute a ‘dismissal?
Under s386(2)(c) of the Fair Work Act 2009 (Cth) (FW Act), a demotion does not constitute dismissal if the employee was demoted, but:
- the demotion does not involve a significant reduction in remuneration or duties; and
- they remain employed with the same employer.
This means that if an employee stays in the business and their pay or core responsibilities are not significantly affected, the demotion won’t constitute a dismissal and trigger dismissal-related rights—such as the right to make an unfair dismissal claim.
What isn’t a dismissal?
In a 2023 case, the employee made an unfair dismissal application claiming she had been forced to resign when her role was modified. The Fair Work Commission (FWC) held that the employee had not been demoted in a way that constituted a dismissal because there was no change to her job title, hours, or salary.
In another decision, an employee was demoted, resulting in a pay reduction of approximately $13,873 per annum, while his duties and location remained unchanged. The FWC found that the relevant enterprise agreement permitted demotion as a potential outcome of disciplinary proceedings, with the enterprise agreement specifically stating that demotion could include “reduction in position rank or grade and pay.” On this basis, the demotion did not constitute a dismissal.
What is a dismissal?
However, if the employee’s pay is reduced or they are stripped of key responsibilities without being expressly authorised by an employment contract, modern award, or enterprise agreement an industrial instrument, this could constitute a termination of employment.
Cases over the past few years include where an employee made an unfair dismissal application when his remuneration was reduced by $4.05 per hour, (a reduction of 9.3%), leading to a reduction in his overtime rate and superannuation contributions. The employee’s supervisory duties had also been removed, as well as his direct contact with clients, leading the FWC to conclude that the employee’s demotion constituted a dismissal for the purposes of the FW Act.
In a 2023 case, the employee’s demotion involved a pay reduction of approximately $16,000, as well as a transfer to a lower graded role. The FWC found that the employee didn’t consent to the demotion, and given it wasn’t expressly authorised under her employment contract or enterprise agreement, the demotion constituted a dismissal.
What are the legal risks?
Unfair Dismissal Claim
If a demotion involves a significant cut in pay or duties, the employee may be eligible to make an unfair dismissal claim. If the employee resigns as a result of the demotion, they may allege that this constituted constructive dismissal.
Breach of Contract Claim
Employment contracts often specify an employee’s duties, title, and salary. Demoting someone and/or reducing their remuneration without their agreement may breach the employment contract, leading to a breach of contract claim.
Discrimination and Adverse Action – General Protections claim
If an employee is demoted after exercising a workplace right—such as making a bullying complaint, or taking leave,—they may claim adverse action under the general protections provisions of the FW Act. In other words, their demotion was a direct result of their complaint or period of leave.
Best Practice and Key Takeaways
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- Check the relevant industrial instrument- does the employment contract, enterprise agreement and/or underpinning award allow for demotion as an outcome of disciplinary proceedings
- Treat the process with the same care you would with termination of employment and follow the same procedurally fair process. This means you should consider whether other alternatives can be implemented before a demotion occurs
- Can the employee’s job responsibilities be modified within their current role, rather than changing their title or pay?
- Is it appropriate to utilise a performance improvement plan or implement tailored training to ensure the employee is given an opportunity to succeed, rather than incur the negative implications of a formal demotion?
- Consider how significant the change will be- are the employee’s duties and remuneration materially reduced?
- Seek the employee’s consent to any changes- if the employee agrees in writing to the new role and terms, the legal risk is reduced
- Communicate openly- explain the reasons for the demotion and allow the employee an opportunity to respond
- Document everything- ensure that you can provide clear and objective reasons for the demotion, including your performance/conduct concerns, meeting outcomes and previous warnings
- Are you satisfied that you could lawfully dismiss the employee – based on their misconduct or performance- if the employee didn’t accept the demotion?
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Given the serious consequences of demoting an employee, and the sensitivities usually involved in these matters, please contact the HR Legal team if you would like further advice.
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This article was produced by HR Legal. It is intended to provide general information only in summary format on legal issues. It does not constitute legal advice, and should not be relied on as such.
