Demotion without cause: is this permitted?
Technically, yes, if your employment is "at-will." In other words, if you do not have a contract for a specific period of time or another employee manual or procedure that might affect your rights, it is lawful for your employer to change your position and reduce your salary as long as they do not base the reduction on an illegal consideration like age, race, gender, disability, religion, etc. However, if you are demoted or your salary is reduced following a complaint about harassment or possibly due to your whistleblower status, an employer could still be retaliating against you in violation of the law and that can be a basis for filing a complaint with the EEOC and pursuing litigation . A 2001 case out of the Eighth Circuit Court of Appeals found that an employee could sue for sex discrimination after being demoted to a significantly lower position and then later terminated. The employer, catering to a majority male clientele, argued that it had a right to demote a female employee because of "a need to market more effectively to male customers." The court found that such a legitimate nondiscriminatory reason could be rebutted by evidence of pretext. In other words, although legally permissible, demotion without cause poses a serious risk to employers that must be avoided through training and best practices and by obtaining legal guidance from experienced counsel. Notably, even if the employer avoids liability for discrimination it may still be subject to liability for tortious interference with employment relations or defamation.
Employment contracts and demotion provisions
Employment agreements can afford employees some level of protection from arbitrary demotions. If an employment agreement contains a clause that expressly permits an employer to demote an employee, the employer may be interested in exercising its right under the agreement to demote the employee without cause. For example, an employment agreement may permit an employer to demote an employee if the employer is doing so in its sole discretion, provided that the employee maintains a similar compensation structure (i.e., comparable base salary, bonus potential, commission potential, etc.), benefits and duties. However, sometimes employers demote employees regardless of the employment agreement. Employers should be cognizant of any demotion clause contained in an employment agreement prior to demoting an employee. Failure to comply with such a clause may result in a breach of contract claim by the employee seeking to recover damages.
Demoted employees and their rights
Employees, like most workers, tend to have more rights than most realize. This is especially true when it comes to demotion without cause. Employees cannot be demoted based on legally protected characteristics. These include, but are not limited to:
If an employee discovers they were demoted based on one of these characteristics, they may be protected under anti-discrimination laws. For example, in California, the Fair Employment and Housing Act (FEHA) protects employees from being fired or demoted based on protected characteristics. Even if the demotion was technically at will, it can be presumed that the discharge was illegal to some extent. That said, the experience of many California workers makes it clear: proving such a presumption can be difficult.
Aside from anti-discrimination laws, employees are also protected from demotion through whistleblower activity. If an employee blows the whistle on an employer for engaging in illegal conduct, an employer cannot demote or fire the employee in retaliation. If they do, the employee has grounds for a claim against their employer for wrongful demotion.
Employees may also bring suit for wrongful demotion if the terms of a contract were breached. For example, if an employee’s contract states they cannot be demoted without cause, and the employer demotes the employee, the employee may be able to sue for the breach of contract. California Labor Code ยง 2924 allows for such damages, as does at-will employment law. If an employee is fired in violation of at-will terms, they may be entitled to file a lawsuit for wrongful discharge.
Workplace policies as a factor in a demotion decision
Employee Handbooks and Company Policies: How Do They Impact a Demotion?
Your company’s policies should set forth the circumstances under which a demotion may occur. For example, the company may tell employees that a temporary demotion may occur if an employee is working through a reduction in force. Or, alternatively, the company may tell employees that a permanent demotion may occur if certain employment positions are no longer available. Of course, if an employee had been advised their employment was secure and only if someone else left employment, would they be considered for the position, these policies will serve as evidence that the temporary employment status was communicated to the employee.
Of course, if your employee handbook reserves the right to change these policies at any time, in writing or verbally, or with or without notice, then management may be able to avoid liability unless they have worked contrary to that policy. For example, if those policies as expressed in the employee handbook reserve the right to make permanent demotions without notice, then management may be able to avail itself of those limitations and make such a demotion. On the other hand, if the employee handbook says nothing about demotions at all, and management conducts a demotion in such a way that a reasonable employee could think the company was just terminating the employee, this policy may allow for liability.
The process to follow if you are demoted
Demotion without cause can be a frustrating experience. A demotion might shift an employee into a position with fewer responsibilities, could impact their salary, and could impact their career plan. An employee faced with a demotion without cause may be wondering what their legal rights are. A demotion without cause has not been discussed extensively in caselaw before. However, the approach the courts take to constructive dismissals can be applied by analogy to demotions without cause.
It is still important to review the specifics of a contract which might allow for employers to demote employees without cause.
Section 4.3: Employer’s Rights The Employer may at any time terminate an Employee’s employment without notice or payment in lieu of notice or terminate a discipline or discharge imposed on an Employee under paragraph 4.2 if the Employee does not comply with a corrective discipline, or where the disciplinary action or discharge is considered by the Employer to be warranted by reasons of misconduct.
Employees facing a demotion should seek legal advice at their earliest opportunity . Employees should review the terms governing their employment to confirm whether there are rights to receive a bonus which are impacted by a demotion. We have seen instances where an employee has lost bonuses worth hundreds of thousands of dollars. An employee will want to understand their financial situation and what advice they need from counsel to assess whether it makes sense for them to explore discussing a voluntary departure, or "buyout", with their employer.
A lot of employees ask whether they should try to bargain with their employer to come to a different arrangement. My answer is that it depends on your individual situation. If there is flexibility in the arrangement, perhaps the employer will come to similar terms that would have been proposed for a voluntary departure. If the offer has some flexibility and an employee feels like there is some room to negotiate, they should seriously consider their goals, how open they want to be with their employer, and whether they want to get their counsel involved to help with the negotiation process.
Examples: Demotion without cause in practice
Case 1: Parr v. Cuthbertson, 2016 BCCA 4
Kerry Parr, a salesperson for motor vehicles for the last 16 years, worked for Cuthbertson Motors LTD ("CML") and its successor for about 8 years. Parr was recruited as a salesperson for both companies and was given access to information and data that had never been shared with average salespeople. For about 2 years Parr was given a salesperson’s split commission plan generally available to only 2 or 3 salespeople with the most seniority. Over the duration of her employment, Parr’s compensation was always over 6 figures, averaging $135,448 plus per year. She was successful in arranging financing for customers without cross-selling to increase dealership profitability.
In 2010 Parr complained to one of her supervisors about the overzealous treatment of one of the other salespeople by the General Sales Manager, Mr. Masson. Mr. Masson’s superiors were informed and Masson spoke with Parr. He referred to her as "a little school girl" who needed to mind her own business and stay out of things which do not concern her.
In June 2012, Parr was reassigned to a different vehicle line. The decision to reassign her was based on the perception that she was not being aggressive in her job and a suggestion that she may want to try a new line. Parr became upset and "stormed off" and did not return for a few days. She filed a complaint with the President, who called her back and said he was going to make things right. He suggested that Mr. Masson would apologize. Parr returned to work and resumed working with customers but told others she was not happy at CML and left for a lunch appointment. Parr did not come back from the lunch break. She offered to resign on the spot but took no action to resign. The next day CML terminated Parr’s employment for insubordinate, uncooperative and unprofessional behavior. Parr sued for wrongful dismissal claiming general damages for the humiliation and loss of self-respect caused by the demotion and constructive dismissal. The trial judge found that she was not demoted or constructively dismissed. The British Columbia Court of Appeal found Parr was not forced out but resigned when she walked out for the lunch break (and did not return) and found no error on the part of the trial judge.
Case 2: Gagnon v. BioAmber Inc., 2015 CanLII 26199 (QC C.A.)
This case involved the reversal of a decision in favour of the employee who had been demoted after complaining about an alleged hostile work environment. The Quebec Court of Appeal reversed the first instance decision and decreased the damages awarded for the non-pecuniary moral prejudice resulting from the alleged illegal and aggressive behaviour of the CEO. The injuries found included anxiety, loss of sleep, headaches, increased alcohol consumption, decline in social life and impact on family life.
Gagnon underwent medication as a result of his injuries, suffered from chronic insomnia, generalized anxiety and significant personality disorder. The Appeals Court decreased his damage award and substituted $50,000 for moral damages (instead of the $100,000 award at first instance) on the basis that the First Instance judge had erred in awarding punitive damages for a single act of illegal behaviour of the CEO who contradicted what appeared to be an implicit promise made to Gagnon by Human Resources that the CEO would not interfere with his workplace conditions.
The future: the evolution of corporate practices
In our fast-paced digital age, the landscape of employment law is evolving faster than ever, including how organizations handle demoting employees without cause. Contemporary trends show that many employers are seeking innovative ways to motivate their workforce, and demotion may be one method under consideration. However, before demoting without cause, it is imperative for employers to understand the surrounding circumstances and develop proactive strategies to navigate them.
In an era where transparency and open communication are highly valued, greater emphasis is placed on ensuring that employees clearly understand the reasons behind any demotion. The decision to demote, whether temporary or permanent, may lead to significant changes in an employee’s status, such as their job responsibilities and perceived value within the organization. Therefore, many employers are increasingly addressing these concerns preemptively through meetings and discussions before the demotion process begins.
Another trend suggests that organizations are more frequently looking to use demotion without cause as part of their ongoing talent management strategies. Companies are focusing on developing their employees even further by providing additional training and scheduling development sessions prior to the actual demotion. This aligns with the adage that "discipline discipline," meaning that employers are working to help employees reach their full potential, even if that means demoting them. This philosophy is worthy of consideration by organizations looking to maximize their talent pool.
While legislative trends in the area of demotion without cause may not be as pronounced as trends in other areas of employment law , it is clear that this area is a hotbed of activity with regard to anticipated legislation. Employees tend to react strongly to demotion without cause, often lodging substantial complaints. Disgruntled employees may challenge their demotion on a number of grounds, including alleged violations of privacy rights, nondiscrimination statutes, wrongful detention statutes, and possibly other causes of action.
One legislative activity that we are seeing more frequently involves the enactment of laws mandating notice periods for demotion without cause. In certain jurisdictions, this affects companies operating in those areas, and it is also being recommended on the federal level. For example, one proposal mandates that existing laws with respect to wrongful dismissal be amended so as to include demotion as a remedy for any action taken by an employer without cause in order to terminate the employment contract.
Another anticipated area of legislative activity includes the development of laws that require employees to produce certain documents at the request of their employers prior to their demotion. Historically, employers would have requested certain of these documents at the onset of the employment relationship. However, employers are now looking for enhanced protections against claims that can arise after an employee’s demotion when the employer may not have the actual documents it requires.
Organizations today are looking for innovative practices to save costs and still maintain their best talent. Demotion without cause is a tool that can be part of this strategy. However, it should be used only with care and based on proper legal advice so as to avoid unforeseen complications.