When does a demotion amount to a termination?

OWEN WEBB - AHA | SA WORKPLACE RELATIONS MANAGER

One of the questions that members pose to the workplace relations team at the AHA|SA is whether an employer can lawfully demote an employee? The question is not a straightforward one, with several factors that need to be taken into consideration when determining the answer.

A recent decision of the Fair Work Commission (FWC) Rory Maloney v Knowmore Legal Service Limited [2023] FWC 1780, provides some good insights into when a demotion would be considered a dismissal.

In this case, Ms Rory Maloney (Ms Maloney) filed a general protections application to the FWC under s.365 of the Fair Work Act 2009 (Cth) (FW Act) alleging that she had been dismissed from her employment with her employer, Knowmore Legal Service Limited (Knowmore).

Knowmore filed a jurisdictional objection to Ms Maloney’s application on the ground that she was not dismissed from her employment.

Deputy President Wright (DP Wright) in hearing the jurisdictional objection ultimately found that Ms Maloney had in fact been dismissed.

Background

Ms Maloney commenced her employment with Knowmore on 9 October 2014 as a Counsellor. In 2019, she was promoted to the position of Regional Client Service Manager and from March 2021 to 12 April 2023 she was employed as a Support and Trauma Informed Practice Manager.

Ms Maloney was employed on a salary of $112,571.04 and her terms and conditions of employment were governed by the National Association of Community Legal Centres Enterprise Agreement 2016-2020 (the Enterprise Agreement).

On 20 March 2023, Ms Maloney was given a letter from Knowmore alleging misconduct and advising her that Knowmore had reached a preliminary view that there were sufficient grounds to demote her to the role of Social Worker/Counsellor.

Ms Maloney provided a verbal response to the allegations on 28 March 2023 and a written response on 29 March 2023.

On 5 April 2023, Ms Maloney received a letter from Knowmore providing a final outcome of their decision, advising her that she would be demoted to Social Worker/Counsellor from 12 April 2023 for a period of 6 months, with the potential to progress to a senior practitioner role in the team at the conclusion of the 6 month period. With her salary reducing to $96,131,58 gross per annum.

Ms Maloney had not attended work since 5 April 2023.

On 1 May 2023, Ms Maloney filed a general protections application involving dismissal alleging that the demotion was a dismissal and in contravention of Part 3-1 of the FW Act. In response, Knowmore objected to her application on jurisdictional grounds alleging that Ms Maloney had not been dismissed from her employment.

To determine whether the FWC had the jurisdiction to hear Ms Maloney’s dispute, DP Wright needed to determine whether Ms Maloney had been dismissed.

LEGISLATION

Relevantly, s.386(1) of the FW Act states that a person has been dismissed if:

(a) The person’s employment with his or her employer has been terminated on the employer’s initiative; or

(b) The person has resigned from his or her employment, but was forced to do so because of conduct, or a course of conduct, engaged in by his or her employer.

However section s.386(2) of the FW Act outlines instances where a person has not been dismissed. Relevantly s.386(2)(c) states that a person has not been dismissed if:

(c) The person was demoted in employment but:

(i) The demotion does not involve a significant reduction in his or her remuneration or duties, and

(ii) He or she remains employed with the employer that effected the demotion.

SUBMISSIONS

In objecting to Ms Maloney’s application on jurisdictional grounds, Knowmore submitted that:

• Ms Maloney implicitly acknowledged Knowmore’s right to demote her, based on her oral and written submissions in response to the letter she received on 20 March 2023.

• At no stage did Ms Maloney or her representative object to the proposed demotion on the basis that it was either a dismissal or unlawful.

• Ms Maloney’s employment contract was varied on 5 April 2023 confirming the demotion, but if the FWC determined that her contract was not varied, they relied upon her contract having a term which directed her to perform other duties.

• The demotion would not constitute termination of employment if the relevant industrial instrument she was employed pursuant to contained a term expressly authorising a demotion. Knowmore argued that the Managing Misconduct Policy referenced in the Enterprise Agreement expressly authorising the demotion.

Ms Maloney submitted that:

• There was no express or implied terms in the Enterprise Agreement or the Managing Misconduct Policy enabling Knowmore to demote her.

• The demotion was significant in terms of a reduction in her duties and remuneration.

• She had not agreed to the demotion, citing Knowmore’s letter to her on 5 April 2023 where it stated in one of the sentences “ … in recognition of your comments about needing to consider your options … “.

• Knowmore did not act in accordance with the Enterprise Agreement when they demoted her.

• Her pay was changed without further discussion.

DETERMINATION

In determining the matter DP Wright looked at four key questions:

Did Ms Maloney voluntarily consent to the demotion?

Is the demotion authorised by the employment contract or an instrument governing it?

Did Knowmore repudiate the contract of employment by demoting Ms Maloney?

If Knowmore repudiated the contract, did Ms Maloney accept the repudiation?

Did Ms Maloney voluntarily consent to the demotion?

DP Wright found that Ms Maloney did not consent to the demotion for the following reasons:

• Ms Maloney’s written response to Knowmore on 29 March 2023 did not demonstrate that she had consented to the demotion.

• Knowmore’s letter to Ms Maloney on 5 April 2023 appeared to acknowledge Ms Maloney’s reluctance to accept the demotion.

• Ms Maloney did not explicitly or implicitly consent to Knowmore reducing her pay and Ms Maloney’s contract specifically required any consent to a change in pay being confirmed in writing which did not occur.

• DP Wright found that Ms Maloney’s employment contract did not permit the demotion. The Deputy President cited that the contract did not provide Knowmore with the authority to vary Ms Maloney’s pay, except where the parties agree to vary the contract in writing.

• There was no variation to the contract permitting the demotion.

Is the demotion authorised by the employment contract or an instrument governing it?

The Deputy President also determined that the Enterprise Agreement did not authorise the demotion because there was no reference in the terms of the Enterprise Agreement or the Managing Misconduct Policy authorising a reduction in pay as an outcome of the disciplinary procedure.

Did Knowmore repudiate the contract of employment by demoting Ms Maloney?

DP Wright found that Knowmore repudiated the contract of employment by demoting Ms Maloney, because Ms Maloney did not voluntarily consent to the demotion, and the demotion was not authorised by the employment contract or the Enterprise Agreement.

If Knowmore repudiated the contract, did Ms Maloney accept the repudiation?

DP Wright found that Ms Maloney accepted the repudiation of her contract. Ms Maloney’s lawyer had written to Knowmore on 7 April 2023 alleging that the demotion was a dismissal and in a further letter on 26 April 2023 her lawyer alleged that her employment had been terminated on 12 April 2023.

Both Ms Maloney and Knowmore agreed that the demotion resulted in a significant reduction in remuneration and therefore the exemption in section 386(2)(c) of the FW Act did not apply in this matter. Accordingly DP Wright found based on the evidence, that Ms Maloney had in fact been dismissed and ordered that the matter be referred for a conciliation conference to determine the dispute under s.368 of the FW Act.

Lessons for Employers

This matter highlights the dangers for employers who demote an employee where there is a significant reduction in duties or remuneration, particularly in the absence of any express terms about demotion in an employment contract or industrial instrument.

Members should speak to the AHA|SA workplace relations team if they are wanting advice on the processes involving demotion.

Source: Rory Maloney v Knowmore