Demoting employees: fair game?

Background

Demotion may not be the most obvious sanction for employers deciding how best to deal with an employee who has committed an act of misconduct or who is under-performing. Generally, employers confine themselves to handing out warnings or, in more serious cases, dismissing the employee.

However, in some circumstances demotion could be a win-win for both parties. From an employer's point of view, although it may feel it has to impose a suitably serious sanction in the circumstances, it may not wish to lose an otherwise 'star player' who is valuable to the business. From an employee's point of view, in the current economic climate, demotion may be considered preferable to dismissal. In addition, where an employee is under-performing they may actually welcome being relieved of some of the pressures of their current role.

But how should an employer proceed with a demotion?

The law

Demoting an employee will, without more, be a breach of their employment contract. In most situations this will probably be a serious enough breach to enable the employee to resign and claim constructive dismissal.

It would also be open to the employee to "stand and sue" by remaining in employment while bringing a claim for unlawful deductions from wages (assuming their demotion resulted in a reduction in salary) and/or unfair dismissal from their previous post.

Although rare, it is not unknown for employment contracts to include a clause which expressly permits demotion as a disciplinary sanction. Employers who do not have such a clause should not impose demotion unilaterally but will need to obtain an employee's consent to such action. Therefore, before taking any action an employer should ascertain the contractual situation of the relevant individual. Employers should be especially careful to make sure that any reference to demotion in a disciplinary policy or staff handbook is contractually binding.

The ACAS Code of Conduct applies to misconduct and poor performance situations and employers must make sure they follow this in carrying out the disciplinary procedure. The ACAS guidance re-iterates that demotion may only be used as a sanction where it is allowed for in the employee's contract or is with their agreement.

Employers who do not currently have an express contractual power to demote in their employment contracts may wish to consider including one in the employment contracts of new employees to give them more options in the future. Employers can not impose contractual changes on existing employees without their agreement, but may consider undertaking a consultation exercise with staff in order to gain their agreement to such a clause.

In the past, demotion was unpopular as stripping employee of their status and responsibilities was regarded as fundamentally unfair. However, given the current economic climate an employee faced with the prospect of demotion or dismissal may be more eager to consent to demotion rather than face dismissal. Employers similarly may view demotion as a way of retaining employees and "shuffling the pack" without having to incur the significant costs of recruiting and training replacement employees.

Practical considerations

Is demotion worthwhile?

Firstly, it is important to ensure that a full disciplinary/poor performance process has been followed and demotion is a reasonable sanction in light of the findings of that investigation. Demotion should only be considered for reasonably serious misconduct or underperformance. Once this has been established the key issues that will need to be considered include:

• Is the employee likely to accept the decision and, if necessary consent to the change?
• Is the employee suitably qualified to work in a demoted role e.g. have they worked in the lower level role before?
• What exactly will the demotion mean in terms of loss of status/responsibilities/reduction in salary? Will their be any knock on effects as regards other benefits e.g. will they also forfeit membership of "executive" benefit or share option schemes?
• Will the employee be re-deployed to another area of the business as part of the demotion or will they continue working in the same team?
• Will the demotion be permanent or for a certain period of time or until the occurrence of a certain event?
• Who will step into the demoted employee's shoes? - rather like the England captaincy, is the role a poisoned chalice or is there an ideal replacement available?
• How will the team function following the "'squad rotation"? Can the demoted employee work with his/her successor and how is the team likely to respond?
• Is the employee clear about the reasons for their demotion and what this will mean in practice? Have they agreed to co-operate with the process of transition and to support their successor, where required?
• How will the demotion be communicated to the rest of the team? Rumours and inaccurate information can often cause serious problems for morale. It is usually best to ensure that the individual concerned is happy for a general "team talk" to take place in order to ensure that everybody knows the new structure of the team.
• Be careful about going public with news of the demotion before it has been discussed with the employee concerned and before they have had a proper opportunity to appeal the sanction - this could amount to a breach of trust and confidence entitling the employee to resign and claim constructive unfair dismissal.
• Is everybody in the team happy with the decision? The situation in the England football team, where a decision was taken unilaterally by the FA to remove the captaincy from John Terry, set in train the events which ultimately led to the loss of the manager, Fabio Capello. It is prudent for any disciplining officer taking the decision to demote to discuss such action with the person responsible for the employee and the team in which he/she works before imposing the sanction. The last thing any employer wants is a team where the line manager also feels aggrieved by a decision that was taken above his/her head. In the worst case scenario, an employer could find themselves facing a constructive dismissal claim from an aggrieved manager who had not been adequately consulted with prior to a decision to demote a member of their team.
• Make sure that the employee's new terms, job description and reporting line are recorded in writing and that the employee signs to confirm their agreement so that there can be no argument in the future as to the extent of the demotion and what it means.

Conclusions

Demotion is not an easy path for any organisation or individual to navigate. In limited situation it may be a good solution but an employer should always weigh up the practical difficulties likely to be created by such a sanction.

Even with an express contractual right to demote or with consent from the employee, demoting an employee can still have negative consequences both for the individual concerned, their wider team and the business as a whole. Any employer faced with the decision to demote an employee should approach the situation in a careful and considered manner. To avoid legal liability, employers must also consider the wider impact that such action will have.