Can You Demote an Employee and Lower Their Pay?

Demoting an employee, cutting their salaries, responsibilities, and benefits can be a legally complex and sensitive matter. In many cases, demoting an employee without notice, consent, or mutual agreement is almost always considered constructive dismissal.

However, there are times when demoting an employee may be done legally and without their consent. In those circumstances, employers should consider first whether a demotion is called for and if it’s the right course of action.

Things to consider before demoting an employee

Before demoting an employee, employers should carefully consider several factors to ensure the decision won’t lead to potential legal issues, such as constructive dismissal claims, workplace discrimination lawsuits, or a breach of collective agreement. Here are some key considerations:

Employment contracts and terms

If the employment contract explicitly outlines the terms of employment, including job responsibilities, salary, and benefits, then making significant, fundamental changes without the employee's consent is more likely to amount to a breach of contract. You should review the existing employment contract to understand each party’s obligations and limitations before proceeding with making any changes.

Constructive dismissal

When an employer unilaterally changes the employment condition to the point where an employee has no choice but to resign, it’s considered constructive dismissal. In some cases, constructive dismissal is called "disguised dismissal" or "quitting with cause". This is because the employer will sometimes present undesirable – and significant – alterations to an employee’s job as an ultimatum to get them to quit: either they resign, or, submit themselves to these unwanted changes. Under those terms, employees can take legal action against an employer and may be entitled to severance pay or damages. 

Workplace discrimination or reprisal

When an employer demotes an employee, it can’t be for discriminatory reasons related to their protected characteristics, such as age, race, gender, or disability. In Canada, both federal and provincial human rights legislation prohibit workplace discrimination. You’re also not allowed to demote an employee as a form of punitive or retaliatory action. Otherwise, the demotion is considered workplace reprisal, which is also prohibited by federal and provincial laws. 

Collective agreements

In unionized workplaces, any changes to employment terms typically require negotiation with the union and compliance with the terms of the collective agreement. Many agreements include clauses that limit an employer's ability to change an employee's job description, salary and benefits, or demote them. 

When can you legally demote an employee?

In some cases, employees may be willing to accept changes to their jobs, responsibilities, salaries, and benefits. The onus is on the employer to communicate these proposed changes clearly and transparently and obtain the employee’s approval. 

However, there are some circumstances where the employer may demote an employee without their consent and without triggering constructive dismissal claims. Here are some scenarios of when you can legally demote an employee:

Performance issues

If an employee is unfit for their role or consistently fails to meet the reasonable requirements of their job, then a demotion may be warranted and defensible. However, the demotion should be a lateral move to a similar position with comparable pay, responsibilities, and benefits.

Conditional promotion

Sometimes an employee may receive a promotion that is conditional or has a probationary period. When the employee fails to meet the requirements of the new position within a predetermined timeline (e.g., completion of training, performance milestones) then the employer may be able to demote them back to their old position or a similar position with comparable pay, salary, and benefits with no ill effects or consequences. 

Temporary business requirements

Employers may temporarily change an employee's role or responsibilities due to fluctuating business needs, such as a downturn in the market or a short-term project. If the change is genuinely temporary and the employee's compensation and benefits remain unchanged, then employers can legally demote an employee.

Do you need help with constructive dismissal claims or employee terminations?

Our qualified HR experts can support you on constructive dismissal claims, resolve workplace disputes, and carry out employee termination. See why 6500+ employers across Canada choose Peninsula as their trusted partner in developing HR policies, documentation and contracts, and performing workplace health and safety risk assessments. Call today at 1 (833) 247-3652 to find out more.