Employees Can Recover For Wrongful Demotion -- Jury Awards $1.4 Million in Damages

In a surprising decision, the California Supreme Court has created new legal rights for employees—and new problems for California employers.  Under the Supreme Court’s new ruling, employees who feel they have been wrongfully demoted can now sue and potentially collect substantial damages.

The Supreme Court announced its holding in Scott v. Pacific Gas & Electric Company, 95 Daily Journal D.A.R. 15073 (Nov. 13, 1995).  In that case, the Supreme Court affirmed damages of $1.4 million, awarded to two engineers at Pacific Gas & Electric Company (“PG&E”).

Facts In The Case

Two employees had worked at PG&E for a number of years when, for reasons that remain unclear, PG&E’s internal auditing department began an investigation into their supervisorial practices and outside business interests.  As a result of the investigation, the company demoted both employees— both lost their supervisory status.  Further, their wages and benefits were reduced by approximately 25%.  Both sued for wrongful demotion.

In their wrongful demotion action, the employees claimed that an implied contract had arisen between them and the company under which they could only be demoted for just cause.  They based this assertion on PG&E’s “Positive Discipline Guidelines” which established a structure of progressive discipline.  Progressive discipline is a system under which disciplinary action is correlated with an employee’s misconduct—starting at a lower level and proceed- ing to higher levels, depending on the degree of the offense.  The employees’ claimed (and testimony at trial confirmed) that the guidelines were intended to be applied uniformly to PG&E’s employees.  In other words, that PG&E intended the guidelines to be rigidly applied—not merely used at the discretion of PG&E’s management.

$1.4 Million Damages Awarded

The jury agreed that an implied contract existed between the employees and PG&E providing that they could only be demoted for just cause.  The jury also found that the two employees were demoted without just cause.  The jury then awarded damages of approximately $1.4 million.  Ultimately, the California Supreme Court was called upon to decide whether a cause of action for wrongful demotion could exist; which it found.

The Supreme Court Decision

Although the California Supreme Court held that an implied contract to demote an employee only for just cause could arise (just like an implied contract to terminate only for just cause could arise) there were some hopeful comments for employers.  The Supreme Court indicated that there was a “strong common law presumption that an employee may be demoted at-will.”  Additionally, the Court held that an employer has the right to alter its policies “so as not to create unwanted contractual obligations.” 

Actions For California Employers

Based on this new decision, it is clear that an implied contract can arise requiring that an employee only be demoted for just cause.  However, the following steps can be taken to help prevent this:

• All California employers should change their at-will statements to indicate not only that employees can be discharged at-will (with or without just cause) but also that the employerretains the right to alter an employee’s status at-will (e.g., change of position, demote, adjust wages), with or without just cause.
• Employers should also make sure that employee handbooks and manuals clearly indicate that although the manual may list steps to be taken in employee discipline situations, these steps are discretionary and not mandatory.  It should state that the employer “retains the right to deviate from these steps or procedures, or eliminate them entirely, at the company’s discretion.”
• If you are a California employer and do not have an at-will statement (nor an employee handbook or manual) one should be created as soon as possible so as to help prevent an employee from bringing a wrongful termination (or now a wrongful demotion) action.

If you have questions regarding this case or need assistance with an employee manual or handbook, or at-will statements, please contact our Labor Department at (310) 858-7700.

Our Labor and Employment Law Department represents employers in wrongful termination, employment discrimination, and sexual harassment cases in state and federal courts.  The department also represents employers in collective bargaining negotiations, arbitrations and matters before state and federal administrative agencies.  In addition, we provide general labor counseling on unionization, personnel policies, grievances and wage and hour issues.

Rosenfeld, Meyer & Susman, LLP, was founded in 1957.  The firm's areas of expertise include: Labor and Employment Law, Litigation, Corporate, Entertainment, Trusts and Estates, Taxation, Family Law, Insurance Coverage and Defense, Real Estate, Employee Benefits and New Media Technologies.

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