When does a demotion amount to repudiation of a contract?

The question of when a demotion might amount to a repudiation of a contract or even unfair dismissal is one that varies from case to case and is largely dependent on what is in an employment contract.

Kerryn Tredwell, employment and labour law specialist and partner with Hall and Wilcox, is well placed to identify circumstances in which demotion can amount to a repudiation of contract by an employer.

She explains that repudiation can occur when a party to the contract (such as the employer) does something to convey that it does not intend to be bound by that contract. In an employment context, repudiation of an employment contract can amount to ‘constructive dismissal’, that is, where the employer’s breach of contract leaves the employee with no option but to resign.

Tredwell tells HC Online, “Common examples of repudiation or constructive dismissal in employment cases include where the employer, without the employee’s agreement, makes a significant change to an employee’s position, title or responsibilities, or reduces the employee’s pay or status.
 
“A demotion will not amount to repudiation or constructive dismissal if the employer has a legal right to make the changes said to amount to the demotion.

“Employment contracts give employers a degree of flexibility to change an employee’s duties and responsibilities, position, title and reporting lines. In disciplinary scenarios, an employer might have a contractual right to demote an employee as part of a contractually binding disciplinary procedure that allows for demotion where misconduct is proven. In such a case, an employee could not claim that the demotion amounted to dismissal or repudiation of contract.”
 
Repudiation can only occur when changes are imposed upon an employee against their wishes. A scenario where an employee would agree to a demotion might be when an employer has grounds for dismissal due to misconduct, but offers instead to demote the employee – there would be no grounds for repudiation or constructive dismissal in this case.

In addition, the Fair Work Act 2009 declares that demotion will not amount to dismissal in circumstances where the demotion does not involve a significant reduction in the employee’s remuneration or duties, and where the employee remains with the employer that effected the demotion.
 
Tredwell says that the phenomenon of demotions leading to unfair dismissal is not particularly commonplace.

“Demotion certainly does arise from time to time as the basis for an unfair dismissal claim, but I would not describe demotion as a particularly common basis for those claims,” she says. “One reason for that might be that a claim of that nature is more likely to be brought (or pursued) by a senior employee or executive – and such employees generally will not be eligible to bring unfair dismissal claims due to earning more than the earnings threshold. Those employees would be left to pursue their claims through the courts.”

In terms of employers guarding against claims of repudiation or unfair dismissal, Tredwell urges employers to tread lightly when considering demotion.
 
“Demotion is a unilateral and substantial alteration to an employee’s duties to the employee’s disadvantage. Employers generally will not have the legal right to demote without their agreement.
 
“Circumstances where an employer is likely to have a legal right to demote will generally be limited to where a contractually binding disciplinary procedure provides for demotion when misconduct is proven.”