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Does demotion constitute dismissal?

A demotion generally refers to the movement of an employee into a lower graded position with the same employer. Demotions may sometimes occur as the result of disciplinary action by an employer (as an alternative to dismissal) or for operational reasons such as a change in the financial circumstances of the business.

Care does need to be taken in instances where a demotion occurs, as if the demotion involves a significant reduction in duties or remuneration, it may be deemed to constitute a ‘dismissal’, even where the person continues to remain employed by the same employer.

In a case heard by the Fair Work Commission in late 2018, an employee who was demoted as a disciplinary measure (and as an alternative to dismissal) was found to have been dismissed by his employer due to the significant reduction in the work duties and remuneration. This finding occurred despite the employee having been the one to first suggest demotion as an alternative to being dismissed. It was held that the demotion had occurred at the employer’s initiative and that the reduction of the remuneration payable was not discussed with the employee.

In the case, an employee was demoted from the position of service supervisor to mechanical service technician. He continued employment in the latter role, taking a reduction in remuneration of 9.3% plus reduced superannuation contributions. The reduction in his duties included removal of supervision of eight other employees, removal of direct contact with clients, and loss of his own office.

The demotion occurred followed a work incident in which the employee became intoxicated. After being asked by his employer to show cause why he should not be dismissed. During this meeting, the employee suggested several alternative options, including demotion.

Following this discussion, the employer decided to demote the employee, but failed to discuss the new position or the changed terms and conditions with him. The employee subsequently claimed that he was dismissed due to the demotion amounting to a “significant reduction” in both work duties and remuneration.
 
The Fair Work Commission concluded that:

-  a demotion that resulted in a significant reduction in work duties and remuneration could be a dismissal, even if the employee continued to work in the demoted position.

- It was not necessary to determine whether or not the inferior (demoted) employment conditions were authorised by the employment contract, or by the issue of a new one. 

The employer argued that the changes to the employee’s duties and remuneration were authorised by his employment contract which provided that he could be required to work in other work locations, perform other duties, assume other responsibilities, and/or work in other roles. However, the contract also included a qualification that this could only be done “to meet the company’s business opportunities from time to time” which was different from demoting an employee as a disciplinary action.
 
The Commission held that the employment contract did not entitle the employer to unilaterally reduce the employee’s remuneration.

The employee had only referred in general terms to being demoted, and a reduction in his remuneration was not discussed. therefore, he did not make a specific offer of demotion. The demotion occurred at the employer’s initiative, therefore the employee was entitled to lodge a claim of unfair dismissal.

A demotion that results in a significant reduction in an employee’s duties and remuneration can be a termination at the employer’s initiative even where the employee “accepts” it and continues working under the new conditions. As such, it is essential that an employer discuss all terms and conditions and reach agreement with the employee before implementing a demotion.

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