There are numerous factors to consider when dealing with an underperforming leader. A legal expert outlines some key things for HR to keep in mind.

There may come a time when a leader in your organisation isn’t performing as expected, and, while underperformance may not warrant dismissal, there is a need to demote them to their former role.

While the demotion of an employee is unlikely to generate as much exposure to risk as a termination, the process needs to be approached sensibly, sensitively and with an awareness of the potential legal consequences.

First things first

While there is generally no strict legal obligation to do so, it would be prudent to first consider placing the employee on a performance improvement plan, or giving them further training, before proceeding with a demotion. Perhaps they haven’t been adequately trained or aren’t aware that their behaviour/approach isn’t appropriate.

You could also discuss their willingness to accept a demotion, as a consensual variation of an employment contract is a low-risk way of effecting a demotion. You never know, perhaps they felt parts of their leadership role were burdensome and would welcome the chance to return to their former role.

The potential consequences

If those initial steps aren’t fruitful, and you want to proceed with the demotion, it’s important to check whether the contract or an applicable industrial instrument expressly allows for demotion, and whether there are any particular steps and processes that need to be followed. 

 Some other things to be aware of include:

Breach of contract: If the employment contract or an industrial instrument doesn’t allow for demotion, or applicable steps and processes are not followed, an employer may be exposed to a breach of contract claim, potentially sounding in damages. A breach of an industrial instrument may also result in penalties and other orders.

It’s also worth noting that a repudiation of the contract can also threaten the enforceability of any post-employment restraints of trade the employee is bound by, if those restraints are contained in the employment contract that has been breached.

Accordingly, consideration should be given to whether such provisions should be covered in a separate agreement.

Unfair dismissal: As we’ve discussed in a previous article, an employer may also be exposed to an unfair dismissal claim if the employee earns less than $162,000 annually or is covered by an award or enterprise agreement.

An unfair dismissal claim may arise if the demotion constitutes a repudiation of the contract and the employee accepts that, resulting in a termination of employment.

An unfair dismissal claim may also be made if the employee remains an employee, provided the demotion results in a significant reduction in duties or remuneration.

A successful dismissal claim could result in the employee being reinstated to their original position, compensation orders, or both.

Adverse action/discrimination: An employer may also face a claim alleging breaches of the adverse action provisions of the Fair Work Act or anti-discrimination legislation if, for example, the employee’s underperformance is due to an underlying health issue.

Accordingly, care should be taken to understand if there are any barriers to performance and, in particular, whether there are any health issues. 

Employment law is a constantly evolving subject. Make sure you’re up to speed with AHRI’s Introduction to HR Law course.

Summary: managing an underperforming leader

To try to prevent any of these consequences, employers should:

• Review the employment contract and any industrial instruments to check if they allow for demotion.
• Consider including an express clause in employment contracts which grants an express power to demote or reassign employees when necessary.
• Keep good records and file notes of underperformance and decisions made regarding the demotion of employees.
• Provide procedural fairness to an underperforming leader, including an opportunity to improve and/or explain the barriers to performance. 
• Discuss performance issues with the underperforming leader and obtain consent to demote where possible. 

This article first appeared in the June 2022 edition of HRM Magazine. The advice in this article is general in nature. Amy Zhang is an Executive Counsel and Team Leader, and James El-Jalkh is a Solicitor at Hamers workplace lawyers.