In a significant decision regarding the statutory meaning of “dismissed”, the Fair Work Commission (FWC) has ruled on appeal that an employer did not dismiss a worker when it reduced his annual pay by almost 10 percent for disciplinary reasons. 

An extended five-member full bench was established by the FWC President to determine this matter when NSW Trains appealed the decision that they had dismissed a shift manager by reducing his salary by $13,870. 

The FWC president set out several issues for determination, most importantly: 

1. Does the expression ‘employment . . . has been terminated’ in s386(1)(a) of the Fair Work Act mean that the: 

• employment relationship has been terminated, 
• contract of employment has been terminated, or 
• employment relationship or the contract of employment has been terminated? 

2. Where an employer imposes fundamental changes to an employee’s contractual arrangements and the employee continues to work for the employer, can those changes give rise to the termination of one employment relationship and the commencement of a new employment relationship? 

Background 

The case involved a shift manager, employed for over 30 years by NSW Trains, who was subject to an investigation into alleged misconduct. Based on the outcome of the investigation, NSW Trains took disciplinary action against him by demoting his role to a lower grade and reducing his pay from $141,442 to $127,569. 

While the shift manager did not agree with the decision made by NSW Trains, he still remained employed by NSW Trains. 

NSW Trains maintained that the FWC misinterpreted that the expression “employment… has been terminated” to mean a termination of the employment relationship, and as a result, failed to consider that this was only intended to apply where a demotion had amounted to a termination of the contract. 

In addition, they argued that this was not a dismissal, as a “reduction in position, rank or grade and pay” were among “disciplinary measures that may be taken after an investigation concludes in a finding of fault”, according to their enterprise agreement and the Transport Administration Regulation. 

Decision 

According to s386(1) of the Fair Work Act (FWA), a person has been dismissed if the employment has been terminated on the employer’s initiative, or the person has resigned but was forced to do so because of conduct, or a course of conduct, engaged in by their employer. 

It continues at s386(2)(c) that a person has not been dismissed when they are demoted, as long as the demotion does not involve a significant reduction in remuneration or duties, and they remain employed with the employer. 

The Full Bench in NSW Trains v James [2022] FWCFB 55 found that “s386(1) exclusively defines the circumstances which give rise to a person being ‘dismissed’ by an employer” and s386(2) does not give rise to a separate category of dismissal. 

“It follows that a person who has been demoted in employment, but who remains in the employ of the employer, has only been ‘dismissed’ if the person’s employment has been terminated on the employer’s initiative,” they concluded. 

The Full Bench agreed that the expression “employment… has been terminated” in s386(1)(a) means termination of the employment relationship and/or employment contract. This is an important change from the 2017 decision in Navitas, where it was found that it applied to the employment relationship. 

Consequently, an employee may be terminated if the employer has repudiated the contract by demoting the employee and the employee remained in employment under a new contract, i.e. the employment relationships still exist. 

Nevertheless, the appeal by NSW Train was upheld because the Full Bench ruled the employee’s demotion did not constitute dismissal. This was because the applicable enterprise agreement enabled the demotion as part of the available disciplinary measures. 

What does this mean for your business? 

Employers need to be aware that when an employee continues to work after being demoted, this does not necessarily preclude the employee from bringing an unfair dismissal claim. 

The Full Bench made it clear that as a general rule, demoted employees who remain employed after their demotion could access unfair dismissal provisions if: 

• the employer had repudiated the employee’s contract of employment by demoting the employee in circumstances involving a significant reduction in their remuneration or duties; 
• the employee had accepted the employer’s repudiation of the contract (as opposed to affirming the original contract), thereby terminating the employment contract; and 
• the employee had continued to be employed by the employer under a new employment contract. 

However, if a contract of employment, industrial instrument or legislation has a provision allowing an employer to demote an employee, demotion will not be a repudiation and hence there is no dismissal. 

Consequently, employers commencing disciplinary procedures against an employee should carefully consider the terms of any applicable industrial instruments including enterprise agreements, legislation, regulations and contracts of employment to determine the permitted outcomes of disciplinary action. 

If you require assistance regarding understanding your obligations around dismissal, or FWC conciliation, contact Bayside Group’s Workplace Relations team today.