Before you cut an employee’s pay or reduce their responsibilities, bear in mind that they might be able to claim their demotion constituted an unfair dismissal.

When is a demotion a dismissal?

That is the essence of NSW Trains v James, which is currently before the Fair Work Commission (FWC).

This question is a significant one with wide-reaching implications, as made clear from the outset when the FWC engaged a full bench to determine the matter.

The case in question

The case deals with how section 386(1)(a) of the Fair Work Act 2009, which defines whether or not a person has been dismissed, should be construed. The case also deals with section 386(2)(c), which defines whether a person’s demotion constitutes a dismissal. 

The issue before the full bench was whether a 9.8 per cent cut in an employee’s salary constituted dismissal.

After the employee filed for unfair dismissal, the FWC initially found that a 9.8 per cent pay cut was not sufficient to constitute a dismissal. The employee, who represented himself at first instance, appealed.

During the appeal, the employee’s barrister, Yaseen Shariff SC, argued that the concept of a dismissal enlivened the employment relationship between an employer and employee, and was not confined to their contract.

Shariff SC posited: “If one said to the CEO of a publicly listed corporation,  ‘We’ve got one of these bells-and-whistles clauses, and we’re going to direct you to go from your $5 million salary plus bonuses to be a janitor on $50,000 a year,’ one might say, ‘Well, that’s entirely permissible within the scope of the contract.’ [But that might still] be an instance where there’s been a termination of the employment relationship.”

Implications for employers

While the above counterfactual was conceded to be “an extreme example”, if such an argument was accepted, it would follow that variations to employment which are within the scope of the parties’ contract could result in variations to the worker’s relationship with their employer.

An employee could have been ‘dismissed’, despite the employee continuing to perform work for, and be paid by, the employer.

Practically, if such arguments are accepted, an employee who has been ‘demoted’ may be able to access the FWC’s unfair dismissal regime. 

This could lead to the employee’s reinstatement, require an employer to pay compensation, or both.

Employment law is a constantly evolving subject. Make sure you’re up to speed with AHRI’s course, Introduction to HR Law. Book in for the next course running from 6 – 7 April.

What should employers do?

An express clause that contemplates particular scenarios and specific reductions may provide greater assistance than one which confers on an employer an unqualified power to change an employee’s duties.

Of course, the situation would be less risky if an employee agreed to the changes, or if the changes were for a defined, short period.

Given the potential ramifications of this case, employers should follow this case closely.

In the meantime, pending judgment, employers should proceed cautiously in effecting reductions to pay and duties, even if the employment contract or industrial instrument allows for it. 

This article first appeared in the March 2022 edition of HRM magazine. The advice in this article is general in nature. Legal advice should be sought for your specific circumstances.

Amy Zhang is the Executive Counsel and Team Leader and Justin Pen is a Solicitor, at Harmers Workplace Lawyers.