Managing people

Can you demote someone for poor performance?

If an employee's performance is unsatisfactory, can we demote them to a more suitable position, albeit with lower pay? Read on to find out the answer.

In this scenario, an employee whose performance as a manager has been unsatisfactory for several months. The employee has been counselled concerning their performance. However, their immediate senior manager feels there is a competency issue that may prevent the employee from meeting the minimum requirements of their position.

Management is now considering offering the employee a demotion to a position that is more suitable to their skills and experience. While their duties and responsibilities would change, a lower remuneration would be attached to the demoted position. Does the employer have the right to demote the employee for unsatisfactory performance?

Whilst demotion may be viewed by the employer as preferable to dismissal. There are several implications you need to be aware of. The Fair Work Act (FWAct) (s386(c)), in explaining the meaning of dismissal for unfair dismissal, states a person has not been dismissed if the person was demoted, the demotion does not involve a significant reduction in the person’s remuneration or duties. The person remains employed with the employer that affected the demotion.

What amount represents a ‘significant reduction’ in remuneration, or reduction in duties, can be difficult to assess and would be determined on the individual circumstances of each case. Also, in this case, it is not known whether the employee will consent to the demotion.

Demotion generally involves the termination of the employee’s existing employment contract and the offer of a new contract. This is because the new contract terms are usually significantly different in at least one important aspect (job status, work duties, responsibilities, remuneration, career prospects, etc.).

Because termination of the contract is involved, it raises the possibility that the employee has actually been dismissed rather than demoted. The employment contract could be repudiated when an employee is demoted without consent and suffers a significant reduction in duties or remuneration. The employer must also avoid any hint of duress or influence in the employee’s decision to accept a demotion.

Because demotion and dismissal are alternate options, the employer should follow the same procedures leading to the decision to either demote or dismiss. These will likely include objective performance reviews and discussions, performance counselling, warnings, opportunities to improve, training, etc.

If a demotion turns into a claim for unfair dismissal, the employer will need to prove it acted with procedural fairness before making its decision and whether there was a valid reason. 

Check terms of the applicable industrial instrument

If the employee’s contract of employment or the applicable modern award or enterprise agreement contains a term allowing a demotion without termination, then any demotion will not be regarded as a termination. The Fair Work Commission (FWC) has determined in several matters that such a term in an enterprise agreement is lawful.

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