State borrows from Peter to pay Paula:  Promoting an employee has its drawbacks when that employee fails to perform satisfactorily.

by Larry Clark

Paula was the manager of a beauty salon for a large chain of shops.  She had earlier been promoted from stylist to manager based upon her favorable performance.  Mary, who was in charge of salons at several locations, realized within a few months that Paula was not performing her managerial duties competently:  The employer was having difficulty retaining hair stylists due to Paula's mismanagement.  Mary told Paula that she was being demoted from manager back to hair stylist in the beauty shop of her choice.  Paula quit.

Mary knew that discharging Paula due to her incompetence as a manager might make her eligible for unemployment benefits.  Mary believed, however, that because Paula had quit her job she would be disqualified.  Nevertheless, the state agency paid Paula jobless benefits, charged to the employer.

This is a common scenario.  An employee performs well in one job and is promottd to the next level where he/she is ineffective.  In fact, you may recognize this as the primary theme of a book written by Laurence J. Peter in 1969.  Peter's description of this phenomenon became known as the Peter Principle.  His observation was that virtually everyone who continues to accept promotions will eventually reach the level of their incompetence, many languishing there for the balance of their careers.

Demotions that lead to employee separations generally result in claimants being found eligible for unemployment benefits.  Most state unemployment precedent holds that a demotion to a lesser job or a substantial reduction in pay gives the employee a compelling reason for quitting.  Such changes in job and/or pay are viewed as a material change in the contract of hire.

There is a way that employers may protect themselves from paying jobless claims for demoted employees that quit rather than returning to their prior status.  At the time when the employee is promoted, he/she may be asked to sign an agreement that he/she will be willing to return to his/her prior level if he/she is unable, within a specified period, to perform satisfactorily at the higher position.

Since such documents provide evidence that the promotion was offered only on condition of satisfactory performance, such written agreements will often protect you from paying jobless benefits.  Furthermore, by making it clear from the beginning that all promotions are probationary, you may be able to improve your chances of retaining some valuable employees.

Larry Clark is a principle member of Employer Advocates LLC, and has been in the unemployment cost control industry for 35 years.

Disclaimer:  The information contained in the examples given on this page is general in nature and is not intended as legal advice.  There are no guarantees that a particular state unemployment adjudicator will rule as others have in the cited examples.  Individuals seeking legal advice concerning the handling of similar matters should consult with their attorney, rather than relying upon the information given.

The purpose of this document is to educate clients and potential clients about unemployment compensation. While some effort has been made to address the many differences in laws and procedures in the 53 different jurisdictions (each of the fifty states plus Puerto Rico, Washington D.C. and the Virgin Islands), the primary purpose of this presentation is to review some basic principles shared by many jurisdictions.