How HR leaders can navigate this tricky terrain
Employers need to be aware that a pay decrease, with no change to an employee’s roles and responsibilities, can be constituted as a demotion leading to a dismissal in accordance with section 386 of the Fair Work Act. Employers can’t simply reduce an employees pay for no other reason that the business is suffering financially or that they have promoted someone else or created a new role. Employees can challenge a demotion which reduces their pay but provides no change to their duties.
“Under the Fair Work Act 2009 (Cth) a demotion may be considered a dismissal if it involves a significant reduction in the employee’s remuneration or responsibilities,” Pooja Kapur, Employment Lawyer, Owen Hodge Lawyers, told HRD. “What counts as significant is unclear, however, since it is not defined under the Act and is instead determined on a case-by-case basis. The employee also cannot consent to the demotion in order for it to be considered a dismissal. If an employee is unhappy with the prospects of a demotion, they should put their concerns in writing to their employer as a starting point. They may then have recourse to take further legal action depending on the particular case in question.”
In a recent case, decided by the Fair Work Commission in 2021, a pay and grade deduction was ruled as a dismissal. The employee in question had been employed as a manager for more than 30 years. Following an investigation into misconduct allegations, the employee was disciplined and his employee classification lowered along with his annual gross salary by approximately $14,000 a year. The reduction in pay and grade was permitted under the enterprise agreement, however, the Fair Work Commission ruled that this amounted to a dismissal. (The ruling has been appealed to a Full Bench, with the issue to be resolved some time in 2022).
“A demotion refers to a significant reduction in an employee’s duties or pay instigated by the employer or employee,” Kapur added. “Because a demotion generally involves the termination of the existing contract, to be replaced with a new contract covering the new terms of employment, it may constitute a dismissal, even if the employee remains employed by the employer. Depending on the circumstances, if the demotion is in fact a dismissal, then it may require redundancy pay.”
But it not always a simple process or clarification, which is why the issue can find itself before the Fair Work Commission or the Federal Court. Murky lines can be drawn if clear communication of roles and responsibilities are not defined from the outset and then changes are instigated.
“Employers are legally allowed to demote an employee in certain circumstances such as if the financial circumstances of the business change or as a result of disciplinary action against the employee,” Kapur said. “Employees can also request a demotion if they want to work less hours or have less responsibilities, such as when moving into semi-retirement or if they want to spend more time with family.”
The role of the HR division is crucial throughout this process. They are the conduit between the employer and the employee trying to communicate with both sides from an empathetic point of view. It is no easy task.
“Human resources plays an important role in navigating this terrain,” Kapur added. “All options should be put on the table for discussion between human resources and the relevant managers, before proceeding with a demotion. In some cases, redundancy may be a better option. In any event, human resources plays an important role in steering the process, communicating with the employee and mitigating any risks.”
