When is a demotion a dismissal?

I am often asked by both employers and employees to provide advice about the legal implications of the demotion of an employee without his or her consent.

Here is an excellent analysis of the law by Perth Fair Work Commissioner BD Williams.

“Applicable principles

The legislation

Section 386 of the Act defines when a person has been “dismissed” as follows:

“386 Meaning of dismissed

(1) 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.

(2) However, a person has not been dismissed if:

(a) the person was employed under a contract of employment for a specified period of time, for a specified task, or for the duration of a specified season, and the employment has terminated at the end of the period, on completion of the task, or at the end of the season; or

(b) the person was an employee:

(i) to whom a training arrangement applied; and

(ii) whose employment was for a specified period of time or was, for any reason, limited to the duration of the training arrangement;

and the employment has terminated at the end of the training arrangement; or

(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.

(3) Subsection (2) does not apply to a person employed under a contract of a kind referred to in paragraph (2)(a) if a substantial purpose of the employment of the person under a contract of that kind is, or was at the time of the person’s employment, to avoid the employer’s obligations under this Part.”

In Navdeep Singh v MSS Security Pty Ltd [[2016] FWC 1857] the Commission as currently constituted considered the case law applicable to instances of demotion that were asserted to amount to dismissal as follows,

“[37] The respondent’s objection is that Mr Singh’s employment contract contains a term allowing demotion without termination and consequently his demotion did not involve termination of Mr Singh’s employment and so Mr Singh has not been dismissed within the meaning of section 386(1) (a) of the Act. Consequently Mr Singh is not a person who is able to make an unfair dismissal remedy application.

[38] It is clear from the evidence that the respondent employer did not express any intention to terminate Mr Singh’s employment. Nothing was put in writing to him that he was dismissed or that his employment was terminated. Mr Singh concedes in his evidence that he was never told he was dismissed or that he was terminated. The respondent’s actions throughout have been consistent with not intending to terminate or dismiss Mr Singh. Nothing the respondent has done amounts to an express termination of his employment.

[39] Mr Singh has not resigned from his employment. Mr Singh simply has not returned to do any work for the respondent since the meeting on 9 June 2015. He has not advised his employer verbally or in writing that he is resigning from his employment. This then is not a case of constructive dismissal under section 386(1) (b) of the Act.

[40] What Mr Singh argues is that the respondent has repudiated his employment contract. Whether there has been a repudiation is a question of fact. Not every breach of contract is a repudiation. A repudiatory breach does not automatically terminate the contract but confers an elective right of termination on the innocent party.

[41] There is a body of case law that deals with this situation. Deputy President Gooley in the matter of Terence Lollback v the University of Southern Queensland considered the circumstances where a demotion is not a termination of employment. This particular matter concerned a circumstance where an employee had been demoted which the employer argued was authorised by the terms of an enterprise agreement and so was not a termination of employment and so not a dismissal.

[42] After considering the line of authority Deputy President Gooley found that she was bound by the decision of the Full Bench of the Australian Industrial Relations Commission in Elizabeth Gorczyca v RMIT University which had concluded that:

“The respondent argues there has not been a termination because the certified agreement permits the demotion without regard to the income loss and provides in effect that it is not a termination. We think that the latter proposition is correct. There has not been a termination because the certified agreement operates to preclude there being one in the circumstances of this case. Put another way we think, at law there has been no termination and if there has been no termination we do not see, notwithstanding the provisions of s.170CD(1B) that there has been a termination for purposes of the Act.”

[43] Deputy President Gooley also considered another Full Bench decision of the Australian Industrial relations Commission in Charlton v Eastern Australian Airlines Pty Limited which turned its attention more broadly to when the termination of employment occurs and held as follows:

“[32] Consistent with the decision in Boo Hwa Chan, a termination of employment occurs when a contract of employment is terminated. This necessarily occurs when the employment relationship comes to an end. However, it can also occur even though the employment relationship continues. Where a contract of employment has been terminated, but the employment relationship continues, this will be because a new contract of employment has come into existence. Therefore, whether the appellant’s demotion involved his employment being “terminated by the employer” within the meaning of s.170CE turns on whether his contract of employment was terminated notwithstanding the continuing employment relationship. This question is answered by reference to general law principles relating to the termination of contracts of employment, unconstrained by the Convention.

[33] The question of when a demotion constitutes a termination of employment within general law principles relating to termination of contracts of employment, unconstrained by the Convention, was given careful consideration by the Full Court of the Supreme Court of South Australia in Advertiser Newspapers Pty Ltd v IRC & Grivell. We respectfully adopt that analysis. Although the decision related to a different statutory context, that context required a consideration of general law principles that are equally applicable in the present case.

[34] Unless the contract of employment or an applicable award or certified/workplace agreement authorises an employer to demote an employee, a demotion, not agreed to by the employee, that involves a significant reduction in remuneration will amount to a repudiation of the contract of employment. If that repudiation is accepted, either expressly or by conduct, then the contract of employment is terminated. If, in such circumstances, the demoted employee then remains in employment with the employer, this occurs pursuant to a new contract of employment in respect of the demoted position. It may be noted that where the employment continues with the employee allegedly acquiescing in a reduction in salary or other terms of employment, difficult questions may arise as to whether the continued employment involves the continuation of the original contract of employment (but with the employer breaching that contract by paying the reduced salary), a consensual variation of the terms of the original contract or the termination of the original contract and a substitution of a new contract of employment.” (Underlining added)

[44] The Deputy President in that case accepted that the demotion authorised by the applicable enterprise agreement was not a termination.

[45] This principle, that a demotion arising from the application of a clause in an agreement is not a termination of employment at the initiative of the employer nor is it a repudiation of the contract of employment, was earlier accepted and applied by Senior Deputy President Drake in the case of Michelle Holland v Qantas Airways Limited.

[46] The broader statement of principle identified by the Full Bench above is that a demotion of an employee by an employer which involves a significant reduction in remuneration that is not agreed to by an employee will not amount to a repudiation of the employment contract if it is authorised by a contract of employment, an applicable award or a certified/workplace agreement.

[47] More recently a Full Bench of the Commission in the case of Phillip Moyle v MSS Security Pty Ltd simplified the applicable principle as follows:

“[12] …Whether or not the exception in s. 386 (2) (c), properly construed, was applicable, it remains necessary for Mr Moyle to demonstrate at the outset that he had been “dismissed” within the meaning of s. 386 (1).

[13] An action taken by an employer to change the remuneration and duties of an employee could not constitute a dismissal under s. 386 (1) where the change was one authorised by the contract of employment.” (Reference omitted)

On appeal the Full Bench [[2016] FWCFB 3546] took no issue with this summary of the applicable case law and principles.

The Full Bench’s consideration, in the case of Philip Moyle v MSS Security Pty Ltd [[2016] FWCFB 372] mentioned above, of the exception in s. 386(2)(c) to the definition of dismissal was as follows,

“[9] We accept Mr Moyle’s submission to this effect. Section 386(1) sets out a general definition of what constitutes a dismissal. Section 386(2) then sets out three sets of circumstances which, even if they fall within the general definition, are deemed not to be dismissals. These are, in effect, exceptions to s.386(1). The third of these exceptions, in s.386(2)(c), relates to demotions in employment. In order to fall within this exception – that is, for a demotion that otherwise constitutes a dismissal under s.386(1) to be deemed not to be a dismissal, both limbs of the exception must be satisfied, as Mr Moyle submitted. The construction adopted by the Senior Deputy President was, with respect, in error because it inverted the exception by making it necessary for an applicant to negative both limbs of the exception in order for the demotion to be a dismissal. This would have the perverse result that a demotion in employment could never constitute a dismissal, even where it is plain that the existing contract of employment has been terminated and replaced by a new and inferior contract, because the employee will necessarily have remained in employment with the employer and thus could not negative s.386(2)(c)(ii).

[13] An action taken by an employer to change the remuneration and duties of an employee could not constitute a dismissal under section 386(1) where the change was one authorised by the contract of employment. In this case, we consider it clear that MSS’s transfer of Mr Moyle was authorised by Mr Moyle’s contract of employment.

[23] We do not consider that there was any repudiation of Mr Moyle’s contract of employment by MSS, and that it continued to operate in accordance with its terms after Mr Moyle’s transfer took effect. Therefore, there was no termination at the initiative of the employer under s.386(1)(a) and no dismissal.”

In the current case, for the Commission to have jurisdiction to consider this application the Applicant must prove her employment was terminated at the initiative of the Respondent.

Even if changes made by the Respondent (including demotion) did involve a significant reduction in her duties and/or remuneration this will not be a termination of her employment at the initiative of the Respondent if the contract of employment or applicable enterprise agreement authorised the Respondent to do this.

A demotion that would otherwise be a dismissal which falls within the exception of section 386(2)(c) of the Act is deemed not to be a dismissal.”

Kinnaird v National Jet Systems Pty Ltd T/A Cobham Aviation Services Australia – Airline Services (2017) FWC 6055 delivered 23 November 2017 per Williams C