Full Bench of the Fair Work Commission confirms the meaning of ‘dismissed’ in unfair dismissal cases

A five member Full Bench of the Fair Work Commission in NSW Trains v James [2022] FWCFB 55 has reversed a single member decision that would have allowed employees who were lawfully demoted to challenge their demotions as unfair dismissals.

This is a significant decision confirming that section 386(1) of the Fair Work Act 2009 (Cth) (FW Act) exclusively defines the meaning of whether an employee is ‘dismissed’ and that employers with a right under an enterprise agreement, or other industrial or legislative instrument, to demote an employee are not exposed to unfair dismissal claims if they properly exercise that right.

Background and the decision at first instance

Following a disciplinary investigation, NSW Trains reduced the grade and pay of a Shift Manager.  The power to do this came from the applicable enterprise agreement as well as legislation in NSW that applies to public transport workers.

The Shift Manager brought an unfair dismissal application in the Fair Work Commission, alleging that the reduction in pay and grade was a ‘dismissal’.  In practical terms, the Shift Manager’s duties did not change and his classification was the same – but his take home pay was about 10% less after his grade was reduced to the lowest level within his classification.

NSW Trains filed a jurisdictional objection to the unfair dismissal application on the basis that the employee had not been dismissed, because he remained employed as a Shift Manager with NSW Trains and the reduction in pay was authorised by the instruments governing his employment (being the enterprise agreement, and the regulations applicable to public transport workers).  NSW Trains submitted that the relevant meaning of dismissed in a situation of demotion is drawn only from section 386(1) which states that dismissed means “termination of employment at the initiative of the employer”, and that there had been no termination of employment.

At first instance, Deputy President Saunders found that the employee had been dismissed and was allowed to access the unfair dismissal jurisdiction.  Deputy President Saunders interpreted the meaning of ‘dismissed’ in the FW Act to include circumstances where an employee had been demoted and had suffered a significant reduction in their pay – even if there had been no termination of the employment, and even if the employment contract, enterprise agreement or other governing instrument permitted an employer to demote the employee.

In his reasoning, Deputy President Saunders looked at the exclusions to the meaning of dismissed in subsection 386(2) of the Fair Work Act.  One exclusion provides that a person has not been ‘dismissed’ if they are demoted in their employment but the demotion does not result in a significant reduction in their remuneration or duties and they remain employed with the employer.

Deputy President Saunders concluded 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.  Deputy President Saunders 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.

The Appeal

NSW Trains appealed this decision on the basis that it considered the Deputy President’s interpretation of the meaning of ‘dismissed’ to be in error.

The Fair Work Commission referred the appeal to a five member Full Bench and issued a statement directing the parties to the appeal to answer particular questions in addition to addressing the appeal grounds raised.  The ACTU participated in the appeal and filed submissions in response to the questions in the statement.

The primary issue in the appeal was whether an employee would be ‘dismissed’ for the purposes of the FW Act if the employer exercised a power to demote the employee in line with an enterprise agreement, or whether protection from unfair dismissal sat outside any contractual or statutory right to demote an employee.

The Decision

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, depending on the circumstances of a particular case.

The Full Bench agreed with NSW Trains’ submissions 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 because he had not established he was dismissed, and so was not able to challenge the disciplinary action as an unfair dismissal.

Key Takeaways for Employers

Employers can rely on their existing powers to demote employees following disciplinary processes.  Not all employers will have this ability, which must be clearly expressed in an applicable enterprise agreement, contract of employment or other governing instrument.

Public sector employers, who can rely on any specific legislation or regulations that deal with reduction in grade and pay following disciplinary processes, will have additional powers to undertake disciplinary action by force of any specific legislation or regulations.

However, the Full Bench specifically cautioned employers with the power to demote employees to follow the procedure in the lead up to any decision to demote an employee.  In this case, there was no challenge to the disciplinary investigation and decision making process that resulted in the Shift Manger’s reduction in pay; if an employee can establish errors or faults in that process, then the power to demote an employee may not be available to an employer and this may create exposure to dismissal disputes.

Employers should ensure their disciplinary, investigation and misconduct policies, and enterprise agreement terms, are closely adhered to and, in complex cases, seek advice before taking disciplinary action.

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