Thinking Outside of Termination: Demotions, Performance Reviews and Contract Variations
Joydeep Hor, Managing Principal
Termination and redundancy can be a financially and emotionally taxing experience for all parties involved.
Many organisations have started to think outside of redundancy and termination to reduce the high costs associated with redundancy payment and recruitment and training of new staff. Alternatives to termination can take various forms, such as change in responsibilities and duties, demotion, geographic relocation and increase in performance targets – all of which involve variations to the employment contract. While contract variations offer a viable alternative to termination, they also carry the risks of unfair dismissal claims, discrimination claims and damages for breach of contract.
Alternatives to Termination
Alternatives to termination could include:
- change in responsibilities and duties;
- geographic relocation;
- increase/reduction in performance targets;
- increase/reduction in remuneration;
- change of title;
- merging different roles;
- and offer of alternative employment.
Checklist question 1: Has the employee accepted the contract variations?
When an employer makes significant changes to the employment, it is important to make sure that the employee formally accepts the changes. Do not take at face value that, because the employee continued to show up to work, they have accepted the variations to their contract. In Russian v Woolworths (SA) Pty Ltd  SAIRComm 131 a manager of a supermarket was accused of misconduct and demoted to a probationary position two grades junior to his present status. The employee did not accept the changed position and took sick leave instead. The employee continued to make use of the company car and receive sick leave payment in accordance with his entitlements under the changed position.
The court found that the proposed changes to the employment amounted to repudiation, a significant breach going to the root of the employment contract. The fact that he continued to receive sick leave payments and make use of company car did not legitimately vary his existing contract.
Lesson for employers:
It is important to make sure that the employee accepts the changes to the employment. This is because if the changes amount to repudiation i.e. fundamental breach of the contract, the employee can seek a remedy for wrongful termination or argue that the original contract remained on foot. When presenting a new contract, put some time limit (e.g. two weeks or one month) on signing the contract and encourage employees to communicate any concerns during this period.
Checklist question 2: Does the variation involve a change in the employee’s role?
When proposing changes to an employee’s role, it is important to make sure that the changes are within the scope of the employment contract. In Cameron v Asciano Services Pty Ltd  VSC 36, the employer offered a Business Development Manager the role of a Customer Service Centre Manager. There was no change proposed to the employee’s remuneration. The employee, believing that he was overqualified for the new role, claimed damages against the employer.
The court found that the employer’s conduct did not amount to a fundamental breach of his employment contract. His employment contract provided that he might be required to undertake other responsibilities and perform other such duties or project from time to time to enable the company to meet its operating needs. The new duties were within the ambit of his employment contract.
However, a change in employee’s duties could also expose an employer to the risk of a discrimination claim. In Thomson v Orica Australia Pty Ltd  FCA 939, a long–standing employee found that her customer portfolio had changed radically from high value to low value clients when she returned from parental leave. The court found that she had been constructively dismissed and discriminated against on the basis of her parental responsibilities. This highlights the need to consider the impact of the changes on the nature of employment overall, including work value and client status – not just remuneration or title.
Lesson for employers:
It is critical to review your standard employment contract to ensure that the contract allows exible work allocation. When proposing changes to employment, it is important to look outside of the objective factors such as remuneration and title and consider the employment as a whole, including work satisfaction, client value and organisational structure.
Checklist question 3: Does the variation involve an increase in performance targets?
Changes in business structure may demand an increase or reduction in performance targets. In Linkstaff International Pty Ltd v Roberts (1996) 67 IR 381, the employer, a recruitment company, offered a new employment contract which sought to increase an employee’s billing target from $3,000 to $7,000 per month. Knowing that she would not be able to arrive at the figure demanded, the employee sent a letter of resignation stating that the new structure was a “drastic change from [her] original terms of employment”.
The employee then brought an unfair dismissal proceeding. It was found that the employer constructively dismissed her by requiring the employee to agree to responsibilities that she was unable to comply with. The employer’s conduct was a significant breach going to the root of the employment contract and it was likely to destroy or seriously damage the relationship of trust between employer and employee.
Lesson for employers:
When increasing the scope of employees’ duties or performance targets, it is important to discuss the changes with the employees to make sure that the new duties or targets are realistic and suitable to the employees’ skills. As a general rule, if the change involves more than 20% increase in the employee’s time or duty, it is important to consider whether the changes amount to a fundamental breach of the contract and the relationship of mutual trust.
Checklist question 4: Does the variation involve geographical relocation of employees?
Employers may consider geographical relocation as an alternative to termination or redundancy. In Kwei o- Okai v RMIT  FCA 534, the employment contract of a lecturer included a condition that he would be based at the Bundoora campus but he may be required to work at other campuses. After a breakdown of the employee’s relationship with his colleagues, the employer directed him to relocate to the city campus. When the employee refused, the employer terminated his employment.
Fair Work Australia found that it was reasonable to relocate the employee to the city campus to resolve the breakdown in the working relationship between the employee and the rest of the staff members. His failure to follow the reasonable command was a valid reason for dismissal.
Lesson for employers:
As a general rule, relocation of more than 15km could raise an argument for a breach of employment contract. If an employment contract states where the role will be based, it is important to specify that an employee may be required to perform duties elsewhere from time to time.
Checklist question 5: What is acceptable alternative employment?
In redundancy situations, an employer can avoid the requirement to pay redundancy payment by offering “acceptable alternative employment”. In Vicstaff Pty Ltd T/A Stratco v Bradley May; Malcolm McFerran  FWA 3141, the employer, a metal goods manufacturer in Victoria, decided to contract out its delivery work and offer two of its truck drivers positions as machine operators, as an alternative to redundancy. The employees refused to take up the offer and demanded redundancy payment under the Fair Work Act. The employer refused to pay on the basis that it had offered “acceptable alternative employment” to the two employees.
Fair Work Australia found that the machine operator role was not acceptable alternative employment. Whether or not a role was “acceptable alternative employment” depended not only on the value of work and the employees’ capacity to carry out the work, but also on whether the work was of a like nature. This involved consideration of a number of factors such as work value, nature of work performed, rates of pay and whether or not the alternative work is considered acceptable by the employee.
Lesson for employers:
When offering an alternative type of employment, employers should make sure that the alternative employment they are offering is acceptable to employees, taking into account all relevant factors such as hours of work, nature of work, rates of pay (including overtime) and the desire of employees.
While contract variations offer a viable alternative to termination and redundancy, if not managed property, they can carry legal risks ranging from unfair dismissal claims and discrimination claims to claims for breach of contract. When proposing changes to the employment contract, employers should leave room for employee consultation. A successful contract renegotiation will be one that balances the needs and aspirations of both employees and employers.