Termination of employment generally occurs when a contract of employment is terminated and the employment relationship ends. However, in certain circumstances, a demotion can constitute a termination of employment even though technically, the employment relationship continues. This potentially leaves employers at risk of unfair dismissal and other dismissal related applications, even where the demotion is in accordance with the terms of the relevant employment contract.

What you need to know:

  •  Choosing to demote an employee in lieu of terminating their employment does not avoid the risk of facing dismissal related claims.
  • In determining whether a demotion constitutes a dismissal for the purposes of section 386 of the Fair Work Act 2009 (Cth) (FW Act), the Fair Work Commission (FWC) will give consideration to whether the employee’s duties and remuneration have been significantly reduced.

Background

 In a recent decision, Scott Harrison v FLSmidth Pty Limited T/A FLSmidth Pty Limited [2018] FWC 6695, Commissioner Saunders was required to determine whether the Applicant’s demotion amounted to a dismissal and whether the demotion was permitted by his employment contract or by FLSmidth Pty Limited’s (FLS) own custom and practice.

Facts

The Applicant was employed by FLS as a Service Supervisor.

In June 2018, FLS became aware that the Applicant and two members of his team had consumed 29 beverages the night before work and that the Applicant had failed to conduct blood alcohol testing before he and his team travelled to work the following day. FLS alleged that there was a significant risk that the Applicant and his team would be above the permitted threshold of 0.00 BAC and that the Applicant and his team had put their own safety and the safety of others at risk as well as the reputation of FLS.

As a result of the Applicant’s actions, FLS demoted him to Mechanical Service Technician (an ‘on the tools’ role) with an associated 9.3% reduction in his pay.

The Applicant subsequently made an application in the Fair Work Commission alleging that the demotion constituted an unfair dismissal.

FLS raised the jurisdictional objection that Mr Harrison had not been dismissed (within the meaning of section 386 of the FW Act). FLS also submitted that it was authorised to demote Mr Harrison as:

  • it had acted under an unwritten rule, universally accepted by all its employees, that if a supervisor was not performing, they would be demoted to a job ‘on the tools’; and
  • it had been authorised to do so in accordance with the terms of the Applicant’s written employment contract.

 The Test

Commission Saunders determined that in order to conclude whether a person who has been demoted has been dismissed within the meaning of section 386 of the FW Act, the relevant test is:

  1. Whether the demotion involved a significant reduction in the employee’s remuneration or duties (whether or not the reduction was authorised by the contract); and
  1. Whether the employee remains employed by the employer that effected the demotion.

If the answer to the two numbered paragraphs above is yes, the test is satisfied and the person is taken to have been dismissed.

Considerations

Commissioner Saunders gave consideration to the following:

  • Whether the Applicant’s demotion amounted to a significant reduction to his duties and remuneration

The Applicant was transferred to a role that resulted in a reduction of his hourly rate from $43.50 to $39.45 (including associated superannuation payments) and the new role did not involve any supervisory or organisational duties.

Commissioner Saunders found that “there is no doubt that the demotion involved a signification reduction in Mr Harrison’s remuneration and duties.”

  •  Whether FLS was permitted to demote the Applicant

FLS argued that it was permitted to demote the Applicant because:

a) The Applicant’s employment contract allegedly contained an unwritten term, established by custom and practice, to the effect that an FLS Service Supervisor could be unilaterally demoted without the demotion amounting to a dismissal at FLS’ instigation.

FLS argued that this unwritten rule was so notorious and well known that, by custom, practice or usage, it had been incorporated or implied as a term of the contract of employment. FLS pointed to two Service Supervisors that had been demoted in the past two years to a role ‘on the tools’ as evidence of this.

Commissioner Saunders rejected this argument finding that, among other things, there was no evidence before him that the Applicant was aware of the terms of the two demoted employees’ contracts of employment or that any such term was incorporated into any of the number of employment contracts the Applicant had with FLS predating his demotion.

b) FLS was authorised to do so by the ‘location’ clause in the Applicant’s employment contract, which read:

“to meet the Company’s business opportunities from time to time, during the course of your employment with the Company, you may be required to:

  • be required to perform other duties and assume other responsibilities, and/or
  • perform a different role”

Commissioner Saunders rejected this argument finding that the clause did not empower FLS to demote Mr Harrison unilaterally and further, to the extent that it conferred a right to FLS, it could only be exercised to meet legitimate business opportunities (as distinct from a means of taking disciplinary action against an employee).

Ultimately, Commissioner Saunders rejected FLS’ jurisdictional objection and found that the Applicant’s demotion was at FLS’s initiative and capable of constituting a dismissal within the meaning of section 386 of the FW Act.

The matter will now proceed to a substantive hearing to deal with the merits of the dismissal.

Conclusion

Whilst choosing to demote an employee is often seen as a kinder alternative to terminating their employment, the FLS jurisdictional decision is a good reminder for employers that demotions come with similar risks to dismissals. As such, employers should seek advice prior to implementing any demotions in order to be fully appraised as to the associated risks.

We are well placed to assist should you need any assistance.