Demotion of an employee may arise when there is a change in the operational requirements of a role or as a disciplinary consequence following an employee’s unsatisfactory performance or conduct.
A demotion is not a dismissal, rather it may include a reduction in one or more of an employee’s title, duties, rank, status or pay. The Fair Work Act 2009 (Cth) (FW Act) – Section 386 clarifies the distinction between a dismissal and a demotion as follows:
A person has been dismissed if:
- the person’s employment with his or her employer has been terminated on the employer’s initiative; or
- the person has resigned from his or her employment, but was forced to do so because of conduct, or a course of conduct, engaged in by his or her employer.
However, a person has not been dismissed if:
- the person was demoted in employment but:- the demotion does not involve a significant reduction in his or her remuneration or duties; and
– he or she remains employed with the employer that effected the demotion.
Under what circumstances can a demotion lead to an unfair dismissal claim?
If a demotion includes a significant reduction in the duties or remuneration of an employee it may be considered a dismissal for the purposes of the FW Act and the employee may have access to the unfair dismissal jurisdiction despite remaining employed. Phillip Moyle v MSS Security  FWCFB 372 is an example of a case where a demoted employee was excluded from the unfair dismissal jurisdiction by the operation of section 386(2)(c) of the FW Act.
- Mr Moyle was employed by MSS Security as a level five security officer under the relevant Modern Award.
- Two years after he commenced employment with MSS Security, Mr Moyle was advised he would be transferred to a different site and work different hours.
- In the new role Mr Moyle was paid at the lesser rate of pay because he no longer had supervisory responsibilities and was therefore classified as a level three security officer.
- Mr Moyles’ union lodged an unfair dismissal action on his behalf despite the fact he remained employed in the lower role.
In applying the unfair dismissal regime, a Full Bench of the Fair Work Commission found:
- In this case, the change of remuneration and duties did not constitute a dismissal under section 386(1) of the FW Act because the transfer of Mr Moyle by MSS Security to another security site, and the variation of the rate of pay paid to Mr Moyle based on the nature of the specific roles he was performing, was authorised by Mr Moyle’s employment contract.
- Had the contract of employment not authorised the transfer of location and duties, the demotion of Mr Moyle by MSS Security would likely have constituted a dismissal under the FW Act because:- the reduction in wages of $1 per hour for an award-dependent and low-paid worker may well have been a sufficiently significant reduction in remuneration; and- the reduction from supervisory to non-supervisory duties may have had a significant effect on the day-to-day duties required to be performed.
This case provides a meaningful reminder of the benefits of drafting an employment contract which takes into account both the employee’s current role, and the potential for future repositioning of their responsibilities.
Demotion and repudiation of an employment contract
Repudiation is conduct by a party to a contract which demonstrates an intention to no longer be bound by the contract, or to fulfil the contract only in a manner that is inconsistent with the party’s obligations.1
Demotions as repudiatory conduct
The unilateral demotion of an employee who suffers a significant reduction in pay or duties may be a repudiation by the employer of the employment contract. The common law concept of repudiation existed long before the statutory unfair dismissal claim was created.
Consequences of repudiation
- Repudiation of a contract by the employer may entitle the employee to damages if they accept the repudiation.
- Acceptance of a repudiation by an employee (expressly or through their conduct) terminates the employment contract.
When can/should a demotion be considered as an alternative to termination?
Demotions can be successfully used in circumstances where:
- the employee is prepared to accept the variations proposed by the employer;
- the demotion does not involve any reduction in remuneration or duties, noting that what is considered significant will be determined on the circumstances of each specific case;
- the applicable employment contract and industrial instruments (Awards or Enterprise Agreements) include an express term that allow for the proposed changes.
Employers should follow the same procedurally fair process when considering demotions as should be applied to termination of employment. Accordingly, demotion should only occur where:
- an employer has engaged in sufficient performance management of an employee and is satisfied it can lawfully terminate the employee’s employment if the employee did not accept the demotion; or
- an employee has engaged in misconduct and the employer is satisfied it can lawfully terminate the employee’s employment if the employee did not accept the demotion.
Lessons for employers
- When a demotion is agreed to between an employer and employee, ensure a revised employment contract is issued reflecting the changes.
- When it is expected that employees will be relocated during their employment or be required to perform a number of different roles that attract different rates, ensure employment contracts contain an express power to demote employees, change the location of their employment, change their duties and change their remuneration based on the nature of the duties they are performing.
- When an employee is promoted, consider if a trial period should be inserted in the revised employment contract that enables the employer to return the employee to their previous position if the employee is not performing adequately in their promoted role within a specified period of time.
- If a demotion is involuntary, ensure the process that led to the demotion of the employee is able to withstand the scrutiny that applies to a termination of employment under the unfair dismissal and general protection regimes.
- Repudiation is a legal concept that operates independently of the definition of what constitutes an unfair dismissal.
If you would like advice or assistance with any issues concerning potential demotion or performance management generally, please contact a member of our Workplace Relations team.
 Koompahtoo Local Aboriginal Council & Anor v Sanpine Pty Ltd & Anor (2007) 149 CLR