Demoting an employee and potentially lowering their pay is a decision that has implications for both the employee and the employer. These implications can range from hurt feelings, all the way to a wrongful dismissal claim.

As with almost any another employment situation, individual circumstances surrounding the demotion will determine whether something constitutes a wrongful dismissal. An employee can often seek damages from their employer if a term of their employment is changed without their agreement. A demotion could certainly fall under this category, with an employer attracting corresponding liability as a result.

Below we at Sultan Lawyers review factors to consider as related to demoting employees in Ontario.

What is a demotion?

A demotion takes place when an employee is reassigned to a role in their workplace that is connected to less responsibility, a lower level of hierarchy or a lower level of compensation than their prior position. This demotion would often take place without the employee’s permission.

Why would an employer demote an employee?

Employers should be alive to the fact that demoting an employee can be illegal and could have significant liability and costs attached. This should be at the forefront when employers are deciding whether demoting an employee is a beneficial workplace management strategy.

There are several reasons why an employer may choose to demote an employee. This could be because after completing their probationary period they were not well suited to their original role, or that they perhaps acted in a way that required a demotion for the health of the company.

Employers could further choose to demote employees because of:

• Work performance, as a performance management procedure;
• As discipline, to regulate or prevent future misconduct; or
• As a part of corporate restructuring, to reposition the employee to suit the company needs.

It is important for the employer to remember that while it was likely negative circumstances that brought them to the decision of demotion, it could be equally as difficult for the employee being demoted. While this is an interpersonal concern, it could also be a concern regarding motivations for employees to seek damages following their demotion.

How does an employment agreement factor in?

Whether an employer can legally demote an employee hinges largely on the provisions contained in the employment agreement between the employer and the employee. In short, employers who have valid contracts that explicitly state that demotions are permitted are likely able to lawfully demote their employees, as long as they adhere to the details of the contract.

This employment agreement could contain provisions with stipulations such as:

• An employee must complete a certain amount of professional development training per year, or else be demoted.
• An employee will be promoted but will be on probation for three (3) months subject to fulfillment of the requirements of their new contract. If the employee does not fulfill their requirements during probation, they will lose their promotion.

Without a valid and enforceable employment agreement, demoting an employee would otherwise likely be considered constructive dismissal.

What is constructive dismissal?

Constructive dismissal is essentially termination without cause as a result of an employer making unilateral changes to fundamental aspects of an employees employment agreement. Thus, in order for the demotion of an employee to be deemed a constructive dismissal, the change in their role would need to be a fundamental and unilateral change to their employment agreement.

If it was found an employer constructively dismissed an employee, the employer would likely owe the employee severance pay, as well as risk owing them additional damages.

Factors that a judge may consider when determining if an employee’s demotion was constructive dismissal are:

• If the employee is lower on the reporting chain as a result of the demotion;
• If the demoted role results in embarrassment for the employee;
• If there were significant alterations to the employee’s position;
• If there was a change in compensation attached to the demotion;
• If another employee took over the role;
• If the demotion could be a barrier to career advancement for the employee; and or
• If the employer acted in bad faith.

There is no one factor that will determine whether a demotion was a constructive dismissal.

Just cause for dismissal exception

A demotion may not be constructive dismissal if the employer is choosing to demote an employee rather than validly dismiss them for just cause.

When the employee has acted in a way that meets the high just cause threshold, they have effectively terminated their original employment agreement. When an employee chooses to demote them instead of terminating their employment, despite their right to do so, the employer is essentially offering the employee a new position.

Courts have supported this position. In Lowery v. Calgary City the court had no doubt that there was a unilateral and substantial change to the employee’s contract, but declined to find his demotion wrongful. In this case, the employer had just cause to terminate the employee.

Lateral move in the workplace exception

Another circumstance where a demotion may not constructive dismissal will be if the demotion is considered to be a lateral change, without a drastic decrease in workplace responsibilities for the employee. In the case of Myers v. Chevron Canada Limited no constructive dismissal was found when an employee was demoted. In this case, the employee no longer had any employees reporting to him, but maintained the same compensation despite his demotion. The court stated in this case that “an employer requires some latitude to structure the affairs of its operation”.

Demotions and reprisal considerations

Ultimately, demoting an employee is a very fact-specific undertaking. Determining when it is valid to demote an employee will likely depend on the circumstances of the employee and their role.

Employers should be alive to the issue of reprisal. If an employee was demoted after reporting unsafe working conditions or a human rights concern in the workplace, this could be considered reprisal.

Return to work plans or accommodations could also look like demotions on their face. Perhaps, for example, the accommodation needs of an employee who had suffered an injury requires that there be a demotion in order to return to their role. On the same vein, if this employee was required to work fewer hours as a part of this return-to-work plan, there may be a reduction in pay.

If the change in role and change in pay in logically connected to the demotion and reduction, they would likely not reach the level of constructive dismissal.

When should an employee accept a demotion?

This is an assessment that will be personal to each employee. It is possible that a court would find that a demotion is actually the constructive dismissal of an employee, as outlined above. This finding could have damages for the employee attached.

An important note about these damages for employees is that it is possible that a court could reduce these damages by the amount that the employee would have made had they accepted the lower paying position.

An employee considering accepting a demotion should consult with an employment lawyer to determine their entitlements and strategy as based on their unique situation.

Key takeaways for employers

Employers who choose to demote their employees, especially those in senior positions, must do so carefully. A successful constructive dismissal claim against them could result in significant termination or severance entitlements owed to the employee.

Employers should be sure not to make changes to employee duties or roles that could be found discriminatory, violating the Ontario Human Rights Code.