Is It Legal to Demote an Employee?

You have progressed through the company’s ranks and suddenly your employer demotes you. Is this legal? It could be. Your employer may not use the term ‘demote’. Instead, they may have altered your position which has left you with a significant pay reduction. Either way, if an employer wishes to demote an employee to a lower position, they must do this with caution. Here is our guide on the demotion of an employee and whether it is lawful. 

Table of Contents


What is a Demotion?

Opposite to a promotion, demotion occurs when an employee’s rank or position in the company’s hierarchy is reduced. The employee or employer may prompt this demotion.

For example, an employer may wish to demote an employee because of: 

  • Under performance 
  • Lack of skills
  • Elimination of their current position 

In contrast, an employee may decide they want their position demoted because they: 

  • Have a change in family circumstances
  • Would like to reduce their workload
  • Are transitioning into retirement 
  • Want to change positions  


Is Demotion Legal?

To determine whether the demotion is legal, you must look at the employment contract and any Awards or Enterprise Agreements applicable to the industry. These provide protection for employment relationships specific to particular industries. Additionally, the Fair Work Act 2009 (Cth) sets out the minimum standards for all employment contracts. For instance, this provides protection surrounding unfair dismissal and unlawful termination of employment. 

As a result, employer’s must be careful as a significant reduction in duties or pay may amount to a dismissal. This can be the case even where the employee is still employed within the company. 


The Difference Between Demotion and Termination

So you might be wondering what’s the difference between demotion and termination? It’s a fine line. Generally speaking, demotion is the termination of the employees current contract. This is replaced by a contract for the new position. Hence, the termination of the initial contract could amount to a dismissal.

Does Demotion Constitute an Unfair Dismissal?

Whether or not a demotion constitutes unfair dismissal is a challenging question. Hence, it is important to note in circumstances where the employee has accepted the demotion at their free will, it is often not considered an unfair dismissal. Similarly, the employment contract may contain an express term permitting the demotion without termination. If this is the case, the employee’s demotion will not constitute termination. Therefore it would not fall under the scope of unfair dismissal laws. 

On the other hand, employee’s have the choice to either accept or reject the demotion. Therefore, if the employee chooses to reject the demotion, their employment may be terminated. Hence, you may be entitled to apply to the Fair Work Commission for unfair dismissal. This must be made within 21 days of the termination of employment. For more information, you can read our guide on ‘Steps to Make an Unfair Dismissal Claim’.

It is worth noting that your demotion may be as a result of redundancy of your current position. If so, you will be entitled to a redundancy payment. For more information, you can read our guide on ‘How Do Redundancy Payments Work?’.


Case Example 

An example of this can be illustrated in the case of Johnson v Zehut Pty Ltd. Here, the employee was the National Sales/Operations Manager of a clothing company. The company sought to demote the employee which resulted in a pay reduction of over $30,000 per year. When the employee rejected, the company considered this as her resignation. The Fair Work Commission found this to be an unfair dismissal as it was harsh, unjust or unreasonable.


Concluding Thoughts 

We understand a demotion can be a distressing and discouraging time for employees. This is why it is important to know your rights as an employee and the legalities surrounding demotion. If you are unsure whether your demotion is legal, contact a lawyer to discuss your circumstances.

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