During a restructure an employer may offer to demote an employee as an alternative to a dismissal for reason of redundancy. Depending on the circumstances, a demotion may be beneficial to both parties.
A demotion generally involves an employer changing an employee’s role which results in less responsibility, reduced seniority and/or reduced pay. However, it is crucial that employers tread carefully if they choose to take such action and ensure they act lawfully when making any such contractual changes.
Demotions commonly occur in situations involving poor performance, misconduct or restructure/an alternative to redundancy. The current climate resulting from the pandemic is undoubtedly causing many employers to restructure and/or make redundancies and this includes reassessing existing positions within the organisation. Employers are often keen to retain valued employees as this also has the benefit of avoiding the costs involved in recruiting and training new staff.
Demoting employees can be an alternative to redundancy. However, this is likely to require either a variation of the employee’s contractual terms or terminating the employment contract and re-engaging the employee on new terms. In this situation employers should be extremely careful that they follow a fair process as it is one which is fraught with legal risk as typically, employees who are demoted are re-engaged on less favourable terms. This can result in legal claims against the employer including claims for breach of contract and unfair dismissal.
Is it legal to demote employees?
Generally an employer is not permitted to change the terms of an employee’s employment contract without the employees consent. Doing so could amount to a fundamental breach of the employment contract and entitle the employees to bring a claim for constructive dismissal (when an employee resigns in response to a fundamental breach of their employer – in law a resignation in such circumstances is considered to be a dismissal).
There are however some exceptions to this and each employee’s contract should be carefully reviewed as some employment contracts include a clause allowing employers the right to vary the employee’s employment terms without consent. Even if the contract contains a variation clause an employer needs to ensure that any changes made are reasonable as such clauses are interpreted very strictly and should generally set out specific circumstances in which they can be used e.g. that the terms can be varied as an alternative to redundancy/dismissal following a restructure.
A demoted employee might even accept the new role but could still bring a claim for unfair dismissal by arguing that the end of/move from his previous role amounted to an unlawful dismissal. To defend such a claim the employer would have to demonstrate that there was a fair reason for the dismissal and that a fair process was followed. For further guidance on this please refer to our previous blogs on fair selection criteria during a redundancy process and redundancies and restructuring of the workplace.
Consulting with employee about proposed changes
If an employee’s employment contract does not provide an express clause for their employment terms to be varied/for demotion then an employer will need to obtain the employees consent. We would however add that even if there is an express clause, it would be best practice for an employer to consult with an employee before taking any such action as this will minimise any future complaints or grievances.
An employer should therefore carefully discuss the proposed changes with the employee ensuring that they inform them of the necessity of the proposed changes along with details of all changes to their responsibilities, status and pay and obtain their agreement before making such changes.
An employer should also consider whether it would be appropriate for the employee to work and or whether the employee is capable of working in the new role. If the new role involves new responsibilities, the employer should also provide appropriate training.
If an employee consents to the changes, the employer should draft a new contract of employment to detail the new terms.
If an employee objects to the proposed changes, the employer may have no option other than to consider redundancy. However, to avoid any potential claims for unfair dismissal an employer must ensure that it follows a fair redundancy process. The steps the employer needs to take to ensure a fair process will depend on individual circumstances and as such we recommend employers seek legal advice as early as possible.