Over the last few years, there has been a developing uncertainty surrounding what it means to be ‘dismissed’ in relation to section 386(1) of the Fair Work Act 2009 and in particular unfair dismissal claims.

In the recent decision of NSW Trains v James [2022] FWCFB 55 the Fair Work Commission (FWC) has ruled on appeal that an employee was not dismissed after their employer reduced his annual pay by almost 10 percent as a result of disciplinary action.

What was the case about?

To provide some background of the case, following an investigation into allegations of misconduct, NSW Trains reduced the grade and pay of a Shift Manager, Mr James.  Although Mr James did not agree with their decision, he chose to remain employed in the position of Shift Manager, neither his duties nor his location of work changed, his renumeration was simply reduced by $13,873.00 per annum. Mr James filed an application for unfair dismissal.

NSW Trains objected to the application on the basis that Mr James had not been dismissed and remained in his position of Shift Manager. NSW Trains argued that the relevant meaning of dismissed in a situation of demotion is drawn from section 386(1) of the Fair Work Act which states that dismissed means ‘termination of employment at the initiative of the employer’ and that Mr James had not been dismissed only demoted.

It was decided, however, that an employee who has been demoted within the ordinary meaning of that word, and who has had their pay significantly reduced, should be able to challenge that action as a dismissal. This conclusion created an expanded meaning of dismissed. It was also concluded that a demotion could enliven the unfair dismissal jurisdiction regardless of any authorisation of a demotion under a contract of employment or governing instrument, like an enterprise agreement.

Appeal of the decision

NSW Trains lodged an appeal to this decision on the basis that they considered the interpretation of the meaning ‘dismissed’ to be an error.

The Full Bench confirmed that the term ‘dismissed’ is defined exclusively in section 386(1), stating 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 within the meaning of s.386(1)(a) of the FW Act.”

Termination of employment meant termination of the employment contract or relationship.

The Full Bench agreed that where a governing instrument empowered an employer to demote employees as an outcome of disciplinary processes, this would not constitute a termination of employment for the purpose of the FW Act.

In doing so, the Full Bench quashed Deputy Saunders’ decision and upheld the appeal. This meant that the Shift Manager’s unfair dismissal application was dismissed.

What does this mean?

Employers ought to rely on their existing powers to demote employees as a result of disciplinary processes. It should be noted that not all employers have this ability. It must be clearly expressed in the employee’s enterprise agreement, contract of employment, or another governing instrument.

The FWC cautioned employers that have the power to demote employees reminding them to follow specific procedures in the lead up to any decision to demote an employee. If an employee is able to establish errors or faults in the demotion or disciplinary process, then the power to demote an employee may not be valuable to the employer and the employer may leave themselves open to dismissal disputes.