At times, an employer may wish to demote an employee following counselling or discipline relating to a performance or conduct issue. It may also be the employee does not have the skills to perform a particular role, and this only becomes apparent after the employee has been employed for several months.

A demotion is the offer by an employer, and the acceptance by an employee, of a lower ranked position, with the consequence of a reduced wage or salary.

Demotion generally involves the termination of the employee’s existing contract of employment and the offer of a new contract. This is because the terms of the new contract are usually significantly different in important respects, such as status, duties or pay.

If a demotion involves a significant change in status and pay then it can amount to unfair dismissal, even if the employee remains employed. A demotion should only be thought about if there is a genuine case for dismissal of the employee.

The Fair Work Act 2009 (Cth)

The Act, of course, provides for unfair dismissal remedies, however, the Act at 386(2) provides:

(2) However, a person has not been dismissed if: …

(c) the person was demoted in employment but:

(i) the demotion does not involve a significant reduction in his or her remuneration or duties; and

(ii) he or she remains employed with the employer that effected the demotion.

So, the test is whether the change in duties or remuneration is “significant”. The word “significant” is not defined by the Act.

As many demotions have turned into claims of unfair dismissal, it should be noted that a demotion should not be considered unless the employer has a genuine case for dismissing the employee as the alternative. There are reasons why some employees may be happy to accept a demotion, such as financial security, but because an employee can claim unfair dismissal, the option of dismissal should be considered.

In some situations an employee may accept an alternate offer of employment by the same employer. Although there may be mutual agreement between the employer and an employee to vary the existing contract of employment, the important factor in any case is whether the employer’s deeds brought the contract to an end.

An employee who is demoted because of a discrimination matter, such as that they are pregnant and in the employer’s opinion ‘can’t do the manager’s job’ could also face a general protections or discrimination claim.

For example, an employee may be promoted to manager level after good performance at a lower level. If the employee fails and is then required to move to a lower position, then the change in duties may be so great that the significant change in status and pay means a dismissal has taken place.

This is not always unfair, particularly if the employer has established it is for a trial period that moving back to the former role is an option and any performance or conduct issues have been discussed.

Change in duties

Confusion can arise when an employee has been directed to perform other duties, which fall within the skill and experience of the employee. It is not a demotion if the tasks are within the range of the employee, but for some reason the employer, for example, has not enforced those tasks, such as a baker cleaning the premises at the end of a shift. The employee may complain vociferously, but that is not demotion.

Repudiation of contract

The employment contract may be repudiated when an employee is demoted, without their consent, and there is a significant reduction in pay or status. If the employee accepts the repudiation, either expressly or through conduct, the contract is terminated. If the employee remains in employment after being demoted by accepting the repudiation they would be under a new contract of employment.

Contract or award/agreement provisions

If the employee’s contract or industrial instrument contains an express term allowing demotion without termination then any demotion will not amount to a termination.

New contract of employment

Depending on the circumstances, the new ‘demoted’ position should be under a fresh contract of employment containing different conditions as to the work to be performed and the rate of payment. The wording of the contract will determine whether the employment is treated as continuous for employment-related benefits.

A provision should be incorporated into the new contract of employment to provide for continuity of service. This may assist to gain consent from the employee, because a loss of long-term benefits may cause the employee to accept the repudiation rather than the contract.

Lessons for employers

Employers should review their contracts of employment to place a contractual term in the contract to the effect that the employee can be demoted. Secondly, if an employee is valuable, but just not in the role that the employee currently serves in, then a process of discussion may be the best way to have the employee accept a new role, one that suits the employees skill set.

Lastly, if the potential demotion relates to the discipline, the better advice is move them out of the business in a fair way rather than demote them.