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Can employers lawfully demote employees?
When faced with performance or conduct issues, employers may look for alternatives to dismissal – one of which is demotion. This usually means reducing an employee’s rank or seniority and, in some cases, their pay.
But can employers legally demote staff?
In this blog, we unravel the complexities of demotion in the workplace to help you understand when it might be appropriate, the risks to be aware of, and the factors to consider when contemplating such a significant change to an employee’s role and compensation.
Can employees be demoted for no reason?
No. In order to demote an employee, employers must have a fair and lawful reason to do so, and the employee’s contract must either allow for it or the employee must agree to the change.
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Demotion and the employment contract
Employers should expressly reserve the right to demote employees in their contracts of employment.
This contractual provision should lay down the circumstances in which demotion will be used (for example, as an alternative to dismissal when dealing with poor performance or misconduct).
Employers should only demote an employee in accordance with the circumstances set out. Crucially, when taking the decision to demote, make sure that it’s not for any discriminatory reason – or you could face claims for unlawful discrimination.
It’s essential that employers follow a fair procedure:
- If you’re considering demotion due to misconduct, you must first conduct a thorough investigation to establish the facts, inform the employee of the allegations, and give them an opportunity to respond before taking any action.
- If you’re demoting the employee for capability reasons, you should provide clear warnings and give them a reasonable opportunity to improve. This typically involves setting performance expectations, offering support or training, and monitoring progress over a defined period before taking further action.
Demoting someone without reasonable and proper cause will be considered a breach of the implied duty of mutual trust and confidence. This could pave the way for the employee to resign and pursue a claim for constructive dismissal.
Even if you have an express provision in the contract allowing demotion, you should still consult with the employee to ensure they agree with the change and help avoid future complaints.
What if the contract doesn't mention demotion?
If there’s no provision in the employment contract allowing demotion, employers must seek agreement from the employee. You should consult with them, explaining the reasons for demotion and stressing that this is an alternative to dismissal. If they consent, make sure to get their agreement in writing.
If, after lengthy consultation, the employee doesn’t agree to demotion, you may need to think about serving them notice that you will terminate their existing contract and offer them a new one with the new employment terms and conditions. Always seek legal advice before dismissing and re-engaging employees.
Keep in mind, however, that in cases of dismissal for acts of gross misconduct, employers may still elect to dismiss the employee without notice if they don’t agree to the demotion and you are not offering re-engagement.
The role of settlement agreements
Employers considering demotion may want to consider using a settlement agreement to protect themselves from Employment Tribunal claims, including claims for breach of contract, unfair dismissal or discrimination.
A settlement agreement is a legally-binding document between an employer and employee which settles any claims that arise from the employment relationship or the termination of employment.
In the agreement, an employee waives their right to bring legal claims against their employer in return for a discretionary severance payment. Most legal claims regarding statutory and contractual rights can be waived as part of the agreed terms in a settlement agreement, including unfair dismissal and discrimination.
If you cannot reach an agreement, it’s important to note that, in some cases, settlement negotiations are protected by confidentiality rules and cannot be used as evidence by either party in legal proceedings. Because of the complexity and risks involved, always seek legal advice early to ensure appropriate protections are in place – otherwise, you leave yourself vulnerable to future litigation.
Final thoughts
Demotion is a sensitive and challenging process that can affect more than just the employee involved — it can also harm team morale and overall workplace atmosphere.
For this reason, when contemplating demotion, you should always explore alternative sanctions that might be more appropriate or effective in the circumstances.
Any missteps could lead to legal liability, so it’s essential to seek advice from an Employment Law expert to minimise the risk to your organisation.
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Contemplating demotion but worried about the dangers?
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