insight
Demoting an employee
Key takeaways: Demoting an employee
- Employers may demote an employee due to poor performance or corporate restructuring.
- Demotions can cause poor engagement and retention and may harm team dynamics.
- Demotions require consistent application of company disciplinary policies and notice requirements.
- Demoting an employee could necessitate changes within the payroll system.
The decision to demote an employee is a difficult one for employers. On the one hand, demotion may cause workplace resentment and disruptive team dynamics. On the other hand, it can provide new training opportunities for people and help companies overcome financial challenges. Employers must carefully weigh these pros and cons and understand all the implications for their business before demoting an employee.
Table of Contents
Can employers demote an employee?
Employers may demote employees as long as it’s done to address performance-related issues or to preserve the financial health of the organization. If workers feel they were unfairly demoted due to discrimination or retaliation, it could pose legal risks for the business. For this reason, employers should consult legal counsel when considering an employee demotion.
Reasons to demote an employee
Employers may consider demoting an employee for poor performance or as a result of corporate restructures.
Underperformance or misconduct
Demotion might be warranted as a disciplinary measure if employees are not meeting performance expectations or violating workplace rules. In these circumstances, employers should consistently apply the company’s disciplinary policies and notice requirements, e.g., warning employees about the potential consequences of their behavior before taking adverse action. Employees should also be offered training and development opportunities so they have a chance to improve.
Corporate restructures
Mergers, acquisitions and budgetary cuts may sometimes cause department hierarchies to be restructured. Instead of losing valued team members, employers might consider demoting them to save money or make room for new personnel with more experience. Employees may not take such a move personally, as the demotion was not their fault; however, the transition could still be difficult.
Problems with demoting employees
Even if a demotion is handled fairly and with dignity for the employee, it still presents risks. Engagement and retention rates might decrease, and team dynamics that were once in harmony may experience discord.
Poor engagement and retention
Employees may resent a demotion, whether it was a disciplinary move or not. They might be less motivated and unproductive in their new role and may eventually resign. Such resignations can be detrimental, especially if the demotion was intended to retain a valued team member amid budget cuts or restructuring. Additionally, employers may face legal consequences if employees believe they were wrongfully demoted.
Uncomfortable team dynamics when demoting a manager to an employee
Sometimes, demotions result in supervisors joining the ranks of their direct reports. Employees demoted in this way might feel uncomfortable and could struggle to acclimate to the team or take direction from a new leader. Team dynamics may be particularly strained if the person assuming the supervisory role was formerly a peer and not an outside hire.
How to demote an employee
Demoting an employee is never easy, but employers can sometimes achieve positive results by notifying workers in advance, delivering the news in person, documenting the meeting and remaining professional at all times. Offering the employee learning and development opportunities may also be warranted if the demotion is due to poor performance.
Provide advanced notice
Demotions and other adverse actions require consistent application of company disciplinary policies and notice requirements. As such, people who are underperforming or committing misconduct should be warned in advance that failure to improve could result in a demotion. Workers who may be demoted as a result of restructuring should also be notified as soon as possible.
Meet in person
Employees should be informed of their demotion by their supervisor, ideally in person, and never by phone or email. A witness may also need to be present, depending on the circumstances. These meetings should cover the reasons for the demotion and what employees can expect in their new roles.
Remain professional
Employees may feel angry or upset about being demoted. It’s up to the managers delivering the news to remain calm and keep the conversation as professional as possible.
Document the demotion
Documentation can help employers explain their rationale for an adverse employment action if a claim is brought by an employee. Employers may also want to outline the terms of a demotion in a letter when notifying employees of their decision.
Offer learning and development opportunities
Employees who have been demoted due to poor performance or a lack of skills should be offered training opportunities to enhance their abilities. If they show measured progress, employers might be inclined to promote them back to their original positions or create new paths for advancement.
Demotion and payroll
Before implementing a demotion with compensation changes, employers should consult payroll specialists and legal counsel to ensure compliance with wage and hour laws. Collectively, they may need to consider the following:
- Employee classification
If an employee’s status changes from exempt to nonexempt as a result of a demotion, the employer must comply with federal and state overtime laws.
- Notification of pay changes
Many states require advanced written notice before a pay reduction occurs. Both the employer and employee should sign an updated offer letter or pay change form.
- Benefit adjustments
Demotions could cause a change in benefits eligibility. Employers should communicate this change in writing, as well.
- Payroll system updates
HR and payroll practitioners may have to update job codes, compensation bands, taxes and other information within the payroll system to reflect the demoted employee’s new role.
Frequently asked questions about demoting employees
What should our leadership ask before deciding to demote someone?
Employers and HR leaders should carefully weigh the pros and cons of demoting an employee. They may want to ask these questions as part of the decision-making process:
- Was the employee given opportunities to improve performance?
- Will the employee excel in a role with fewer responsibilities?
- How will the demotion affect team dynamics?
- Is the employee likely to stay with the company if demoted?
How should we document and communicate demotions?
News of a demotion should be delivered during an in-person meeting and accompanied by a written letter explaining the reasons for the demotion and the employee’s new role within the organization. Any prior warnings or notifications about the demotion should also be saved in case they are needed to defend a wrongful demotion suit.
How can we support employees after the demotion?
Employers should give demoted employees ample learning and development opportunities. This support is vital if employees are demoted because of inadequate skills or performance. Training gives them an incentive to improve and potentially advance within the company when another position becomes available.
What are examples of unfair demotions?
Employers should not demote an employee on the basis of a protected characteristic, such as race, gender, ethnicity or age. Employers should also refrain from taking adverse action in retaliation against an employee who files claims of harassment or other workplace misconduct.
Can an employee refuse to be demoted at work?
Employees may resign rather than accept a demotion. Such turnover is one of the risks employers run when choosing to demote workers. If employees believe their demotion was wrongful, they might also file a lawsuit against the employer.
This article is intended to be used as a starting point in analyzing employee demotion and is not a comprehensive resource of requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services.
Want more exclusive business insights like this delivered to your inbox?Subscribe now
