Demotion

Demotion is when an employer changes a worker’s role to reduce their duties or remuneration. This may occur as a penalty for poor performance or due to changing business needs. In some circumstances, an employee has the right to refuse a demotion or make a claim for unfair dismissal. Otherwise, the employee may accept the offer or leave the organisation. This article explains the legal ramification of demotion in the Australian workplace.

What Is Demotion?

Demotion occurs when an employer makes a detrimental change to a worker’s employment. This change might reduce the employee’s salary, responsibilities, duties or work location. Typically, it involves the termination of an employee’s current contract and the creation of an entirely new employment contract. A demotion usually happens either because of employee misconduct or disciplinary action or because of company restructuring, a change in ownership or a merger.

An employee may have reasons to accept a demotion, such as an alternative to redundancy. When organisational needs change, an employer must offer an affected employee any available alternative employment, even at a lower salary or level. An employee is legally entitled to refuse this offer of alternative employment and opt instead to accept redundancy.

An employee who freely agrees to a demotion cannot claim termination and unfair dismissal. However, an employee who remains employed in a demoted position under protest or for financial reasons can still make a claim relating to the demotion.

Unfair Dismissal

An employee who does not consent to the demotion and is terminated can make an unfair dismissal claim to the Fair Work Commission. An employee is only eligible to apply when they:

• Have worked for their employer for at least six months (or 12 months for smaller businesses);
• Are covered by an enterprise agreement, modern award or earn less than the statutory high-income threshold; and
• File within twenty-one days of their termination.

The FWC can order the reinstatement of an employee to a position similar to their pre-demotion role. It may also order that the employer pay the wages lost between the termination and reinstatement. Where reinstatement is not possible, the employer may have to pay compensation of up to six months of wages.

Demotion And Termination

A demotion can constitute a constructive dismissal under the Fair Work Act 2009. Workplace law stipulates that if the demotion is serious enough, it is fundamentally the same as being fired. However, a demotion only constitutes a dismissal if there is a “significant” reduction in remuneration or duties. Because the Act does not define the word significant, the FWC typically uses the word’s ordinary meaning. On that basis, there would need to be a relatively large reduction in remuneration or duties to constitute a dismissal. The seriousness of the demotion depends on the circumstances of each case.

Is Demotion Legal?

A demotion may be legal, depending on the terms of the employment contract, enterprise agreement or modern award. An employment contract establishes the terms of an employment relationship and can authorise an employer to demote an employee in specific circumstances. If the employment contract or industrial instrument expressly allows demotion without termination, then demotion will not constitute termination regardless of the significance of the reduction in remuneration or duties.

Case Study: Demotion As Dismissal

In 2014, the Fair Work Commission heard the case of Angela Johnson v Zehut Pty Ltd. This case involved an employee who worked for the same clothing retailer for more than a decade as National Sales Manager and National Operations Manager. She was eventually asked to manage a poorly performing retail store and agreed on the proviso that she maintain her current salary package. Within the year, the company sought to change the terms of her employment. She was asked to accept a wage reduction of over $30,000 annually.

When the employee refused to accept the demotion, the company treated her refusal as a resignation. The FWC concluded that the company had effectively terminated her employment without a valid reason. In the circumstances, the dismissal was unfair, harsh and unreasonable.

Case Study:  Reduction In Duties And Remuneration

In 2018, the case of Scott Harrison v FLSmidth Pty Ltd came before the Fair Work Commission. The applicant was a Service Supervisor before he was demoted to the position of Mechanical Service Technician (Experienced). While he remained employed, he was in a different position with reduced responsibilities and remuneration.

The employee made an unfair dismissal claim to the Fair Work Commission. In response, his employer raised a jurisdictional objection because they had not terminated his employment.  The FWC found that the employee had suffered a 9.3% reduction in wage, reduction in his overtime and superannuation entitlements, and a significant reduction in supervisory duties. Consequently, the FWC found that the applicant’s demotion constituted dismissal under s.386 of the Fair Work Act, and the employer’s jurisdictional objection was dismissed.

Please call 1300 038 223 or make an appointment to chat with one of our specialist employment law solicitors. Our team can help if you have any questions about demotion and your workplace rights as an employee.