Is it legal to demote an employee who isn’t up to the job? A lawyer explains why it’s “one of the riskier paths to take”.

Sometimes, no matter how much you support an underperforming employee and invest in their development, they may show few signs of improving.

It leaves you wondering what to do next, and the various options start to circulate in your head: should you cut your losses and let them go? Is there still hope for improvement if you offer them extra support? Or could you opt for an in-between solution, such as demoting them to a lesser role?

Chris Hill, Principal Solicitor and Founder of Stadium Legal, says demotion could be one possible avenue if you think the employee is right for the company, but not meeting expectations in their current role.

He says the option to demote an employee remains an “important tool to have in your suite of remedies”, but warns that there are significant legal implications.

“I wouldn’t say demotion is dead or that no one uses it anymore, but it is one of the riskier paths employers could take.”

Legal ins and outs of demotions

If employers want to leave open the possibility of a demotion, it’s best to explicitly state this in the employment contract, or check that it’s included in a modern award or enterprise agreement, says Hill.

“You need to have an express clause that allows you to change someone’s duties, drop their salary, or both. That’s what really sets you up to be able to lawfully demote someone.

“There are some contracts which state an employer can change an employee’s position or duties without mentioning any salary change. I think that comes down to the employee experience and morale. If you’re a new employee starting in a company and you see that your employer can drop your salary any time, it might leave a bad taste in your mouth.”

In the absence of a demotion clause being included in a contract award or enterprise agreement, it could still occur if an employer proposes one, but attaining the employee’s consent is essential, says Hill.

“If you don’t have a right to do so in a contract, and then you force the demotion on them – whether it’s just changing their duties by dropping them down a level or changing their salary or both – there are a number of legal avenues that open for an employee if they don’t expressly accept it.

“They may be able to sue for unfair dismissal even while they remain employed for remedies such as compensation or potentially even reinstatement into their ‘undemoted role’. They may also be able to sue for breach of the employment contract.

“It becomes a legal minefield, and it’s probably not a very practical disciplinary remedy because of the potential risks involved.”

Employers should also be wary of potential discrimination claims, says Hill.

“Even if you’ve got an award, contract or enterprise agreement that says an employer can unilaterally demote someone, pay them less or change their role, it still doesn’t get the employer out of other areas of the law which have protections for employees – such as adverse action (general protections) or unlawful discrimination claims.

“If an employee is demoted, they could allege it was based on discriminatory grounds, such as their race, gender, age, disability, or because they’ve made a complaint about someone or about the workplace… That demotion could be unlawful.”

When you could demote an employee

Given the legal complications that could arise, Hill says he rarely sees an “unfettered employer right to demote an employee and reduce their salary” in employment contracts.

But there are some circumstances when a demotion might be suitable.

In large hierarchical organisations, and particularly in ones that tend to have many conduct or performance issues, demotion might be an effective avenue to keep in your toolkit, says Hill.

“Depending on the industry, there might be room to include a possible salary change in a contract… You might want the ability to move people up and down, and a well-drafted clause will deal with most of the legal issues that could come up.”

Demotion could also be relied upon if an employee is promoted prematurely.

“In really big workforces, you might have big groups of people being elevated as team leaders and it doesn’t work out but you want to keep them working at a particular level but they haven’t been able to set up during a leadership role… or maybe they were hired in that role but your realise after probation that it’s not quite right but they could be great in another role.”

“If you’re a new employee starting in a company and you see that the employer can drop your salary any time, it might leave a bad taste in your mouth.” – Chris Hill, Principal Solicitor and Founder of Stadium Legal.

If an employee is under pressure in their personal life, they might be more open to a demotion.

They could even welcome the chance to do work with lower stakes, says Hill, and they might take a slight pay cut in the process.

“That could be a great solution, but again, it comes back to them agreeing with the potential outcome,” says Hill.

Alternatives to demoting an employee

Taking a drastic step such as letting an employee go or demoting them should be treated as a last resort – and only after an employee has been given a reasonable timeframe to improve.

For underperforming employees, developing a performance improvement plan (PIP) is one essential step that needs to happen first, with weekly or fortnightly check-ins to track the employee’s performance over a period of a few months.

“Make sure there are clear performance expectations, so they know what they need to do in order to succeed,” says Hill.

Hill says employers also consider giving a warning, retraining an employee or issuing other types of disciplinary action, depending on the issues.

Before demoting an employee, there are steps that HR and managers should take to allow the employee a chance to improve. Kathryn MacMillan CAHRI, Founder and Managing Director of CIRCLE Recruitment & HR, advises on a three-step approach for implementing a PIP:

• Communicate the issue. The conversation should include your observations about the employee’s performance or conduct issues, and how it’s impacting the team and company, says MacMillan.
   
• Ask for a response. “Some employers will say you’re not doing this and this but they don’t ask why something is happening and find out if it’s a motivation, resources issue or something else.”

• Give them a clear timeframe to improve. “There’s no quick answer here. It’s very much a case-by-case basis depending on how high the KPIs are, the employee’s seniority, whether or not you believe the underperformance is due to a lack of caring or motivation, or whether it’s somebody who is not making the grade for other reasons.”

If all available avenues have been exhausted and a company is considering a demotion, the decision shouldn’t be made lightly, says MacMillan.

“There would be few circumstances where you could demote somebody. When you’re looking at the motivation level, skills or competencies of an employee who isn’t performing, you may find they’re not happy either. Focus on coming to a mutual agreement about them doing something else, or taking a sideways step.”

Hill also queries whether demoting an employee will achieve the desired outcome.

“Think about what you’re trying to achieve. Is it to make this person better because they might not be the right fit. Or should you look at retraining or exit options?

“Are you going to get the best work out of them if they’ve had their salary docked or if you’re going to give them completely different work to what they signed up for? A demotion can be a halfway house, and even if it’s legal, consider if it will lead to a good outcome for both the employer and employee.”

Unsure whether you can demote an underperforming employee? AHRI’s Introduction to HR Law course could put you in the right direction. The course can be delivered in-house and tailored to your organisation’s needs. Enquire here.