With ample industrial instruments, policies and procedures governing the workplace, employers across the nation are tasked with navigating a minefield of competing advice when conducting disciplinary management without exposing their business to an unfair dismissal claim.

In Todd James v NSW Trains [2021] FWC 4733, the Fair Work Commission determined that a significant reduction in salary without a reclassification to the role and responsibilities of an employee may constitute an unfair dismissal pursuant to section 386 of the Fair Work Act 2009 (Cth) (FWA).

Following an investigation into allegations of misconduct, Mr James was disciplined by way of reducing his gross annual salary from $141,442 to $127,569. Given that Mr James suffered a reduction in pay which was ‘important, notable and of consequence, having regard to its context and intensity’, the demotion constituted a constructive dismissal thereby permitting Mr James to file an unfair dismissal application.

 

In what circumstances does a demotion constitute a termination?

For the purposes of the FWA, a ‘dismissal’ occurs when an employee is ‘terminated at the employer’s initiative or if they have been forced to resign by the employer’s conduct’.

The matter of Todd James v NSW Trains held that a demotion will constitute a dismissal when it involves a significant reduction in the employee’s remuneration or duties, and the employee remains employed. Ancillary case law has considered that ‘termination of employment’ refers to termination of the employment relationship, rather than the employment contract.

Therefore, a significant variation to the terms of the employment contract such as a reduction in remuneration or duties may constitute a termination of an employment relationship. In the event that a demotion is an authorised form of disciplinary management in accordance with an employment contract or industrial instrument, depending on the severity, it may constitute a variation warranting dismissal.

The outcome of this decision geared employees to challenge the validity and fairness of certain disciplinary actions including demotion. With employers warned to tread carefully, NSW Trains appealed the decision and the Fair Work Commission have switched the goal posts once more.

In NSW Trains v Todd James [2022] FWCFB, the Bench confirmed that ‘the repudiation of a contract of employment by variation that is accepted and gives rise to a new contract of employment also results in the termination of the employment relationship’. However, provided the employee makes clear their objection to the demotion, they are not taken to have affirmed their original contract of employment by merely continuing to work.

Nevertheless, the question to be tried concerned whether the employee has been dismissed per s 386 of the FWA ‘if an employer exercises rights under a statute, enterprise agreement or employment contract to demote or significant reduction an employee’s remuneration or duties’.

The majority determined that:

“The demotion of an employee exercised under a power in an industrial instrument or statute and in accordance with its terms will not constitute a dismissal for the purposes of s386 of the FWA, where the instrument provides that demotion does not constitute termination of employment”.

It was held that Sydney Trains were acting within the provisions of their Enterprise Agreement, which prevailed over the contract of employment and displaced the contract of employment to the extent of any inconsistency.

Quashing the decision, the majority dismissed Mr James’ unfair dismissal claim.

 

Key Takeaways

Operating a business requires a solid framework of policies and procedures that govern the behaviour and relationships in the workplace. Importantly, drafting iron-clad employment contracts and enterprise agreements which provide employers broader scope to pull employees into line is crucial to minimising exposure to costly unfair dismissal claims.

With a rapidly evolving employment landscape, contact our workplace team for guidance on preparing tailored workplace documents and navigating performance management effectively.