A demotion typically involves an employee being moved to a lower graded position with different responsibilities and less pay. It might be the result of disciplinary action by an employer (instead of dismissal), a restructure or for financial reasons.

A demotion should not be confused with a legitimate direction to perform other duties which fall within the parameters of an existing position. 

Employment contracts

An employment contract may be repudiated when an employee is demoted, without consent, and suffers a significant reduction in pay. If the repudiation is accepted, either expressly or through conduct, the contract is terminated. 

If a demoted employee accepts the repudiation and remains in employment, they would be under a new contract of employment. However, a demoted employee may remain employed in the demoted position without agreeing to it – i.e. under protest or for financial or similar reasons. 

If an employee’s contract, modern award, or enterprise agreement contains a term allowing demotion without termination then any demotion will not amount to a termination. 

Factors to consider

An employer may consider demoting an employee for disciplinary reasons or because a position has become redundant.

While this may be viewed as preferable to dismissal, there are factors you should be aware when considering demotion.

 

Award/agreement/contract of employment provision

Unless a contract of employment, applicable award or enterprise agreement authorises an employer to demote an employee, a demotion (not agreed to by an employee) which involves a significant reduction in remuneration will amount to a repudiation of the employment contract. 

Unfair dismissal

As demotions can turn into unfair dismissal claims, it can be argued that an involuntary demotion should not be implemented unless an employer has a genuine case for dismissing the employee as the alternative. Some employees may be happy to accept a demotion but, even in those cases, issuing a new contract of employment is strongly recommended.

Fair Work Act

Section 386(2) of the Fair Work Act states that an employee has not been dismissed if the demotion doesn’t involve a significant reduction in remuneration or duties, and they remain employed with the same employer.  

However, the Act does not define the meaning of ‘significant’, so it will come down individual circumstances. If a demotion doesn’t involve a significant reduction, an employee is excluded from claiming the demotion was an unfair dismissal. 

When is it a dismissal?

This will depend on the terms of an employment contract. Generally, an employee is entitled to reject a demotion. ‘Rejection’ can include protesting about the demotion and mitigating losses by moving to the lesser position while awaiting the outcome of the protest or claim. 

Demotion generally involves terminating an existing contract of employment and offering a new one. 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 a contract is involved, it raises the possibility an employee has been dismissed rather than just demoted. 

Procedural fairness

Demotion is an alternative to dismissal, but it indicates the organisation values the employee and believes they can still make a positive contribution to the business. If the latter is not true, and dismissal is otherwise justified, then dismissal is the better option. Employers 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 of unfair dismissal, an employer will need to prove it acted with procedural fairness.

Case law

Court and tribunal cases have held that where a contract or policy contained provisions for demotion as an alternative to dismissal, the demotion was not an unfair dismissal. This outcome will, however, depend on individual circumstances, e.g. whether the demotion was implemented fairly and in compliance with an employer’s stated policy. 

However, there is also support for the contention that a demotion may constitute a dismissal for the purposes of an unfair dismissal action under the Fair Work Act. An employer must be careful to avoid any hint of duress or influence in an employee’s decision to accept a demotion.  

Sometimes, an employee may accept an alternate offer of employment by the same employer. Although there may be mutual agreement to vary an existing contract of employment, the important factor is whether the employer’s actions brought the contract to an end. 

Disciplinary action

An employer may demote someone due to misconduct or serious misconduct. This would need to be a term of the applicable enterprise agreement or contract of employment to be enforceable. Even where such a term exists, the reasonableness of an employer’s action could be challenged before the FWC in an unfair dismissal matter. 

Provided the circumstances are reasonable, an employer can demote an employee as a form of disciplinary action. 

Alternative employment

An employee who accepts a demotion to a lower paid or lower status position is usually not deemed to have been ‘dismissed’ for the purposes of unfair dismissal laws. Where an employer does not have alternative work within the organisation but arranges employment with another organisation, the redundancy provisions under the NES may not apply. 

Industrial courts and tribunals have considered the test of acceptability of alternative employment. Matters to be considered include: pay levels, hours of work, seniority, fringe benefits, workload, and job security. 

Returning to position after promotion

Some contracts have provisions that allow for a ‘promoted’ employee to return to their former position (and its reduced entitlements) if the promotion doesn’t work out.

However, if someone rejects a proposed demotion and the employer then insists on it, it is likely termination of employment has occurred. This is because the employee did not have a ‘right’ to return to a former position. This type of contract term may be effective if an employee agreed to it initially, and readily accepted the later demotion. 

Note: mitigating losses by working in a demoted position after protesting about it does not amount to accepting an employer termination of the previous employment contract.

Effect on leave entitlements

Another consequence of an employee’s demotion is the effect on leave entitlements. With the general exception of long service leave, the National Employment Standards, modern awards and enterprise agreements usually provide that an employee is paid the ‘base rate of pay’ or their ‘ordinary rate of pay’ at the time of taking leave. Although the leave may have been accrued when the employee was earning a higher wage, any leave or public holiday taken subsequent to an employee’s demotion is payable at the lower rate of pay.

In the case of long service leave, most state and territory legislation provide that an employee’s ordinary pay is either the current weekly pay or the average weekly pay over a specified period (commonly 5 years), whichever is the greater.

New contract of employment

A new ‘demoted’ position may be under a fresh contract of employment containing different conditions and pay rates. The wording of the contract will determine whether the employment is treated as continuous for employment-related benefits, but such a provision may be included in a new contract.

On the other hand, some benefits may apply because of a statute, such as long service leave, which in some circumstances will deem employment to be continuous regardless of the terms of the employment contract.

Redundancy

A common provision in redundancy clauses in industrial instruments refers to where an employee is transferred to lower paid duties due to redundancy. Usually the provision states that the employee is entitled to receive their higher rate of pay for what would otherwise be the relevant period of notice (or payment in lieu of difference between the rates).  

In the case of a transfer to lower paid duties, the employment continues and is not deemed to have been terminated therefore an employee would not be entitled to severance payments.