Regardless of whether the employment relationship has been terminated, a demotion involving a significant reduction in pay may constitute a dismissal that enables employees to seek an unfair dismissal remedy.
In August 2021, the Fair Work Commission found that a shift manager employed by NSW Trains was ‘dismissed’ when his demotion resulted in a reduction in pay from $141,442 to $127,569. NSW Trains appealed this decision and a Full Bench was constituted to determine the appeal.
With the Full Bench reserving its decision for a later date, this is an important case for employers to be aware of, as it will have significant implications for determining whether an employee has been dismissed.
Mr James was employed by NSW Trains as a shift manager for over 30 years. Following an investigation into allegations of misconduct, NSW Trains took disciplinary action against Mr James by reducing his rail classification grade and gross pay (from $141,442 to $127,569). Mr James remained employed by NSW Trains and performed the same duties at the same location.
Mr James applied for an unfair dismissal remedy. NSW Trains objected to this, arguing that the disciplinary action was not a demotion or a dismissal. The Commission considered whether Mr James was demoted, and if so, whether this constituted a dismissal pursuant to the Fair Work Act 2009 (Cth).
Commission determines that Mr James was demoted and consequently dismissed
The ordinary meaning of the word ‘demote’ is ‘to reduce to a lower grade or class (opposed to promote)’. There was no change to Mr James’ position, duties or location of work. However, Mr James’ classification was changed from RC6 Level E to RC6 Level A and his annual gross remuneration was decreased by $13,873.
The Commission found that the ability to progress, depending on performance, within a classification from Level A to Level E, coupled with a higher amount of remuneration payable at each level, strongly suggested that each level was a higher grade than the one below. Therefore, Mr James was demoted because he was moved to a lower grade and classification.
Section 386(2)(c)(i) of the Fair Work Act provides that a person will not be considered to have been dismissed if they were demoted in circumstances where the demotion does not involve a significant reduction to their remuneration or duties. A ‘significant reduction’ is one which is important, notable, or of consequence, having regard to its context and intensity. All relevant circumstances must be considered to determine whether a reduction is significant, based on an objective test rather than the subjective views of the employee.
Whether disciplinary action (e.g. a demotion) is permitted by the terms of an employment contract, enterprise agreement, award or applicable legislation is irrelevant to whether a demoted employee has been dismissed. Therefore, the Commission found that it was irrelevant that the enterprise agreement conferred a discretion on NSW Trains to impose particular punishments in disciplinary proceedings, including a reduction in Mr James’ position rank or grade and pay.
Mr James’ demotion resulted in his net income decreasing from approximately $2,900 to $2,400 per fortnight. This also impacted his accrued leave entitlements, superannuation benefits, and potential redundancy pay benefits. The Commission accepted that Mr James’ demotion involved a reduction in his remuneration that was significant. Therefore, Mr James was dismissed from his employment with NSW Trains within the meaning of section 386 of the Fair Work Act.
NSW Trains appeals decision
The President of the Commission considered that the appeal raised several questions, including:
- Does the expression ‘employment … has been terminated’ refer to the termination of the employment relationship or contract of employment?
- Where an employer imposes fundamental changes to an employee’s contractual arrangements and the employee continues to work for the employer, can those changes give rise to the termination of one employment relationship and the commencement of a new employment relationship?
- What is the meaning of the expression ‘demoted in employment’, ‘a significant reduction in … remuneration or duties’, and ‘remains employed with the employer that effected the demotion’?
- Has the person been dismissed even if their employment has not been terminated on the employer’s initiative?
- Where an employer imposes fundamental changes to an employee’s contractual arrangements that are detrimental to the employee, but the employee remains employed by the employer, is it only where those changes constitute a demotion in employment involving a significant reduction in remuneration or duties that the employee has been dismissed?
- If an employer exercises rights under a statute, enterprise agreement or contract of employment to demote a person, has the person been dismissed?
In a hearing before the Full Bench on 14 December 2021, NSW Trains contended that it had complied with the provisions under the relevant enterprise agreement and regulations to reduce Mr James’ rank and salary as part of disciplinary proceedings.
However, Mr James argued that the exercise of a right conferred by an enterprise agreement in a statutory context has contractual consequences, which in these circumstances was a significant reduction in salary.
The Full Bench’s decision is expected to be published in the coming months. This will be an important decision for employers to keep an eye out for as it will have significant implications for employers considering disciplinary processes involving demotions or pay reductions.
Key takeaways for employers
A demotion that involves a significant reduction in the employee’s remuneration or duties may constitute a dismissal even if the employee remains in the employer’s employment and there has been no termination of the employment relationship.
Employers must be cautious when taking disciplinary action that involves a reduction in pay, as it is costly and time consuming to defend an application for an unfair dismissal remedy.