An employer may opt to impose punishments other than dismissal for employees who are guilty of misconduct. Any punishment that is meted out must be dependent on the degree and severity of a misconduct. One such option is to demote or downgrade the employee.
The act of demoting involves the transfer of an individual to a lower rank in status within the organization chart of the company. Such punishment is etched in Sec. 14(1) of the Employment Act 1955.
It is therefore legally within an employer’s right to impose a punishment of demotion on their employees, provided that such right is exercised only in justifiable situations.
In Samsudin Zainol Abidin & Ors v. Malaysian Airline System Berhad  4 ILR 118, the Court held that the right to downgrade a workman pursuant to a finding of guilt of a charge of misconduct is a form of disciplinary action open to the employer under its inherent right to impose the appropriate punishment.
However, despite the legal right of employers to impose demotions, it can turn into an ugly legal problem if applied wrongly or if it is done in a disproportionate manner.
For example, in Nippon Paint (M) Sdn Bhd v Abd Rahim Md Ibrahim  2 LNS 0654, the Court held that while an employer has the right to demote an employee, an employee should only be demoted or downgraded within the same category of service. For example, a senior manager can be demoted to a junior manager, or a Level 1 Executive can be demoted to a Level 2 Executive. Similarly, a sales supervisor may be demoted to a normal sales staff.
In the Nippon Paint case, the Claimant was demoted from Marketing Services Sales Executive to a Sales Supervisor. The Court held that the demotion was from one category (Executive Category) to another category (Normal Staff). This demotion meant that the entire basis of his employment contract has changed, and it amounted to a fundamental variation to his contract, allowing him to claim constructive dismissal.
Employers are often surprised when an employee claims constructive dismissal due to a demotion. After all, in the employer’s view, the punishment of demotion is often viewed as a more “lenient” approach as opposed to the highest level of punishment which is dismissal.
That being said, employers must be careful when dishing out demotions as punishments. The law places the burden on employers to justify the demotion. Although it is well within their right to impose such a punishment, the act of demotion must not go against established industrial jurisprudence and not be seen as too excessive or disproportionate.
About the author: Amirul Izzat Hasri is an associate in the dispute resolution practice group at Donovan & Ho. He has experience in a diverse area of practice, including general civil and corporate litigation, judicial reviews, land related matters, defamation, debt recovery, and shareholder and boardroom disputes. He has also appeared in Industrial Court proceedings, having represented both employers and employees in unfair dismissal claims.
Donovan & Ho is a law firm in Kuala Lumpur, Malaysia. Our practice areas include employment law, dispute resolution (litigation and arbitration), corporate and tax advisory, and real estate/conveyancing. Have a query? Contact us.