Can demotion be considered a form of unfair dismissal?

A demotion occurs when an employer makes detrimental changes to key aspects of an employee’s role, such as decreasing how much the employee is paid, the duties they perform, their work location or the people they manage.

Generally, demotions happen due to performance issues or changes in the needs of the business. Demotion will often involve termination of the employee’s existing contract and an offer of a new contract. Employees may choose to accept the offer or leave the company, or in some circumstances, an employee has a right to refuse the demotion and make an unfair dismissal claim through the Fair Work Commission.

The Fair Work Act (the Act) states that if a demotion involves a significant reduction in an employee’s duties or remuneration, it may constitute a dismissal, even if the employee remains employed at the same company.

If the demoted employee explicitly agrees to the demotion, it is unlikely they can make an unfair dismissal claim. However, facing significant changes to your employment can be stressful, so an employee may remain employed in the demoted position without agreeing (under protest) because of the financial risk of losing their employment. In those situations, the employee may be able to claim unfair dismissal, even if they are continuing to work for the employer.

Because the Act does not define the word significant, the Fair Work Commission will look at the circumstances of each case.

In the case of Harrison v FLSmidth Pty Limited [2018] FWC 6695, Mr Harrison was demoted from Service Supervisor to a Mechanical Service Technician. While employed in the new role with significantly reduced responsibilities and remuneration, he lodged an unfair dismissal application with the Fair Work Commission, claiming he had been dismissed by way of demotion. The employer raised a jurisdictional objection to this claim because Mr Harrison’s employment had not been terminated. Given Mr Harrison was still employed, the Commission had to consider whether the changes to his pay and duties were significant enough to constitute a dismissal within the meaning of s 386 of the Act.

The Commission found that the demotion resulted in a 9.3% reduction in pay, reduced entitlements, including superannuation contributions, and a significant decrease in duties. Despite there being no official termination of employment, the Commission found the demotion constituted a dismissal, and the employer’s jurisdictional objection was dismissed.

It is important to note some contracts or industrial instruments contain an express term allowing demotion without termination. In these circumstances, an employee’s demotion will not amount to termination, and they cannot make a claim for unfair dismissal.

Disclaimer: This article should not be construed as legal advice and is not intended as such. If readers wish to obtain advice about anything contained in this article, they should speak with a lawyer and discuss their individual circumstances.