What Happens When An Employee is Demoted?

What Happens When An Employee is Demoted?

Demotion And Changes To Compensation


The relationship between an employer and employee is governed by an employment agreement. An employment agreement is a contract that outlines the terms and conditions of the employment relationship between the employee and employer. Whether an employer can demote an employee or make changes to their compensation will largely depend on what is stipulated within this agreement.


Can You Demote An Employee In Ontario?


A court may refer to the employment agreement when deciding whether a demotion is legal. If an agreement expressly grants an employer the right to demote on specific grounds, and the agreement is consent to by the employee, then in accordance with the agreement the employer may possess such a right. 


However, even if the employment agreement allows for the demotion of employees, this contractual right is not absolute. Employers may still be exposed to legal risks when demoting an employee. 


In demoting an employee through unilateral changes to the employment agreement, an employer runs the risk of triggering a constructive dismissal claim. In order to avoid damages, it is prudent for employers to understand the common law restrictions on the demotion of employees. 


Illegal Demotion: Constructive Dismissal


A demotion of an employee that has the practical effect of termination will be considered a constructive dismissal. This may occur in instances where an employer makes changes to terms that are fundamental to the employment agreement, and which pressure the employee into resignation. 


In Brake v PJ-M2R Restaurant Inc. the Ontario Court of Appeal held that the demotion of an employee to an inferior position, causing humiliation or embarrassment, constituted a constructive dismissal. 


When an employer unilaterally makes changes to the terms of an employment agreement, they may be liable for the constructive dismissal of an employee. The change must be made to a term that is fundamental to the employment contract. A constructive dismissal claim may be trigger by a unilateral change to the following fundamental terms:


  • Hours of work
  • Compensation
  • Compensation packages
  • Employee benefits
  • Location of work 
  • Job role and responsibilities 


As the basis of the relationship between an employer and employee is the employment agreement or contract, any fundamental changes that do not consent to will be treated as a breach of contract. 


Is It Legal To Change An Employee’s Compensation?


In some instances, demotion may arise from changes to compensation. If the possibility of such changes is expressed within the employment agreement, then there is no breach of contract. For example, an employment agreement may include a probationary period of three months following an employee’s promotion. This would grant an employer the ability to demote and change an employee’s salary in the event that the employee did not meet expectations during the probationary period. 


However, in most circumstances, a change in compensation would likely be seen as constructive dismissal. In Ontario the following changes to compensation or benefits have been held to amount to a constructive dismissal:


  • A reduction in employee pay
  • Changes in the manner of compensation (i.e. from salary to commission and vice versa)
  • The loss of privileges such as the right to a company car




Employers may limit their legal risks by including provisions that allow for certain changes to an employment agreement. However, such changes may run the risk of being construed as constructive dismissal. To limit exposure to legal risks, employers should supplement any changes with reasonable notice to employees. 

Contact Us:

If you are an employer facing a constructive dismissal claim or a recently demoted employee. Our team of experienced employment and human rights lawyers at Achkar Law can help. Contact us by phone toll-free at +1 (800) 771-7882 or email us at [email protected], and we will be happy to assist.

If you are a small or medium-sized company looking for full-service support with a same-day response, visit our Chief Legal Officer Program page for our strategic solutions.

Disclaimer: The goal of this blog is only educational. It is to help you understand some of the common and general inquiries we receive. Please do not rely on this as legal advice because legal advice is tricky and dependent on specific situations. Make sure you consult with a lawyer before using this information. Should you require legal advice for your particular situation, fill out the contact form, call (800) 771-7882 or email [email protected].