Q. We have an employee whose performance as a manager has been unsatisfactory for a number of months. The employee has been counselled with respect to their performance however his immediate senior manager feels there is a competency issue which may prevent the employee from meeting the minimum requirements of their position. Management is now considering offering the employee a demotion to a position we feel is more suitable to their skills and experience. While their duties and responsibilities would change, there would be a lower remuneration attached to the demoted position.  

Does the employer have the right to demote the employee for reasons of unsatisfactory performance? 

 

A. While demotion, in this circumstance, may be viewed by the employer as preferable to the dismissal of an employee there are a number of implications of which an employer should be aware when considering the demotion of an employee. The Fair Work Act (s386(c)) in explaining the meaning of dismissal for the purpose of unfair dismissal, states that a person has not been dismissed if the person was demoted in employment but the demotion does not involve a significant reduction in the person’s remuneration or duties, and the person remains employed with the employer that effected the demotion. What amount represents a ‘significant reduction’ in remuneration, or reduction in duties, can be difficult to assess and would be determined on the individual circumstances of each case. Also, in this case, it is not known whether the employee will consent to the demotion.

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 at least one important aspect (job status, work duties, responsibilities, remuneration, career prospects, etc). Because termination of the contract is involved, it raises the possibility that the employee has actually been dismissed rather than demoted. The employment contract could be repudiated when an employee is demoted, without their consent, and suffers a significant reduction in duties or remuneration. The employer must also be careful in avoiding any hint of duress or influence in the employee’s decision to accept a demotion.  

Because demotion and dismissal are alternate options, the employer should follow the same procedures leading up to the decision to either demote or dismiss. These are likely to include objective performance reviews and discussions, performance counselling, warnings, opportunities to improve, training, etc. If a demotion turns into a claim for unfair dismissal, the employer will need to prove that he or she acted with procedural fairness before making its decision and whether there was a valid reason. 

 

Award or agreement 

If the employee’s contract of employment or the applicable modern award or enterprise agreement contains a term allowing a demotion without termination then any demotion will not be regarded as a termination. The Fair Work Commission has determined in a number of matters that such a term in an enterprise agreement is lawful. 

 

Bottom line 

A demotion which involves a significant reduction in the employee’s remuneration or duties may be deemed by the Fair Work Commission as unfair dismissal unless permitted under the contract of employment, or applicable modern award or enterprise agreement.