|
Wrongful Demotion January 1996 California employers are all too familiar with claims of wrongful discharge
by terminated
Court recognized a new cause of action for employees who are not discharged
but merely
The plaintiffs in the Scott case, C. Byron Scott and Al Johnson, had
each been employed by
In 1988, P.G.&E. began an investigation into plaintiffs’ supervisory practices and outside business interests. The investigation resulted in charges that plaintiffs were negligent supervisors and that their outside business gave rise to a number of conflicts of interest in which P.G.&E. was disadvantaged. Consequently, plaintiffs were suspended with only a brief explanation of the charges against them. Over a month later, they were finally permitted to read the report outlining the charges against them but were denied a copy of the report. They were given three days to respond to the charges, which they did at length and with extensive documentary support. Scott and Johnson were nevertheless demoted to positions they last held over a decade earlier, and they were relieved of all supervisory authority. Their salaries and benefits were reduced by approximately twenty–five percent. Plaintiffs then sued, alleging, among other claims, that P.G.&E. had breached an implied contract not to demote employees without good cause. The plaintiffs’ contract theory was based largely on P.G.&E.’s detailed personnel policies, in particular P.G.&E.’s system of “positive discipline.” Set forth in a document entitled “Pacific Gas and Electric Company: Positive Discipline Guidelines,” P.G.&E.’s discipline system outlined progressively more serious, but constructively oriented, responses to employee misconduct. The guidelines provide that, if an employee has a conduct, attendance,
or work–performance
Scott and Johnson argued that P.G.&E. had not followed these policies
when it demoted them
In the Scott opinion, the California Supreme Court ruled that the evidence did indicate that P.G.&E. intended to bind itself to its disciplinary policies. The guidelines stated that it was P.G.&E.’s intention that the disciplinary process be uniformly applied to all employees, and one of P.G.&E.’s personnel managers testified that P.G.&E. expected employees to rely on company disciplinary policies. Finally, the Court found no evidence that the disciplinary policy was merely followed at the discretion of P.G.&E. management. Consequently, the Court affirmed that P.G.&E. had breached an implied contract not to demote without good cause. In support of the establishment of the new wrongful demotion cause of action, Justice Mosk wrote that an employer’s policy that its employees will not be demoted except for good cause can become an implied term of an employee contract just as a policy restricting termination or providing severance pay. Although there is strong common–law presumption that an employee may be demoted at–will, that right is not absolute, and the trier of fact (i.e., the jury) may look to the employer’s policies, practices and communications in order to infer a policy limiting demotion to situations where good cause is present. Justice Mosk also stated that once the trier of fact determines that
an implied agreement not to
The Court’s opinion does concede that many employers will view the Scott
decision with great
First, employers have the ability to alter their policies and practices to avoid unwanted contractual obligations. Employers seeking to avoid implied contract causes of action such as wrongful demotion or wrongful termination should undertake audits of their inventory of personnel forms, recruitment practices, offer letters, applications forms, employee handbooks, and benefit plans, to ensure that they contain no express or implied promises of just cause protection. By taking these actions, a company can significantly limit its exposure to wrongful discharge and wrongful demotion claims. The Court also observed that vague promises about the terms and conditions of employment that provide no definable standards will not support enforceable contract claims. By way of example, Justice Mosk cited as unenforceably vague promises “reasonable salary increases,” “reasonable annual bonuses” and the right to “actively and meaningfully participate.” At a practical level, the most troubling aspect of the Scott decision may be the inherent uncertainty as to what constitutes a “demotion.” There is little California case law defining the term demotion, but the Scott case is likely to give rise to litigation over whether and when a reduction in rank, salary or responsibility is serious enough to constitute a demotion and therefore to form the basis for a claim of wrongful demotion. In summary, the Scott v. P.G.&E. decision is a troubling development
for California employers. At the same time, there is a silver lining. Employers
should accept the Court’s invitation that they limit their exposure to
so–called wrongful demotion claims (and perhaps all other implied contractual
claims including wrongful termination) by “consistently articulat[ing]
and implement[ing] policies designed to preserve their traditional prerogatives.”
This can be accomplished by undertaking a thorough audit of existing forms,
policies and procedures to ensure that all communications with employees
make it clear that there is no requirement of good cause as a prerequisite
to either demotion or termination.
Employment Law
SUPREME COURT ALLOWS LAWSUIT FOR WRONGFUL DEMOTION The California Supreme Court's recent decision in Scott v. Pacific Gas & Electric Co. significantly expands the ability of employees to sue their employers by recognizing for the first time an employee's claim for "wrongful demotion." In Scott, two senior employees started a consulting business which they operated on evenings and weekends. Although PG&E's policies did not prohibit employees from moonlighting, the company demoted the employees after determining there were conflicts of interest between their consulting business and PG&E. The employees claimed they were not warned or allowed to correct the situation prior to their demotion. The employees sued, claiming that PG&E had not followed its own personnel policies when summarily demoting them. Those policies, they argued, gave rise to an implied contract not to demote without good cause. The juryagreed, and awarded $700,000 to one employee and $625,000 to the other. The Court of Appeals reversed the award, deciding that a claim for "wrongful demotion" was too vague to enforce. The Supreme Court disagreed. The Supreme Court found there was ample evidence from PG&E's personnel policies to support the jury's verdict. A basic premise of PG&E's policies, the Court said, was that employees would be disciplined only for good cause. The employees had reason to expect the company to follow its own policies, and the jury found PG&E had failed to do so by demoting the employees without first applying progressive discipline procedures. The Scott case represents a broad application of the Supreme Court's 1988 decision in Foley v. Interactive Data, where the Court held that an employee may overcome the presumption of "at will" employment by proving the existence of an implied contract not to terminate the employment relationship absent good cause. As the Court said in Scott: "Conceptually, there is no rational reason why an employer's policy that its employees will not be demoted except for good cause, like a policy restricting termination or providing for severance pay, cannot become an implied term of an employment contract." Although earlier cases had allowed employees to sue for wrongful discipline
under anti-discrimination laws, Scott v. PG&E is significant because
it recognizes that, through their personnel policies and practices, employers
can create enforceable promises as to discipline of employees, regardless
of discrimination. The Court's decision also recognizes that employers
can limit their exposure to contract liability by consistently articulating
and implementing policies designed to preserve managerial prerogatives.
Employers are advised to review their personnel policies to ensure that
they make only those promises the company is able and willing to keep.
December 1995 Vol. 1 No. 6 ISSN 1087-6219
In This Issue Supreme Court recognizes claim for "wrongful
demotion"
Go to the Newsletter Link to subscribe or to leave any comments you may have on the newsletter. Supreme Court recognizes claim for "wrongful demotion" In one of its rare recent decisions in favor of an employment litigation plaintiff, the California Supreme Court has recognized a cause of action for wrongful demotion. The court's ruling rested on evidence of an implied in fact agreement not to demote without good cause. Pacific Gas & Electric had a written policy of "positive discipline," which provided for a series of "constructive" responses to employee misconduct. The policy provided employees with an opportunity to correct deficient performance, before serious disciplinary measures were invoked. Byron Scott and Al Johnson worked for PG&E in a senior management capacity. Scott and Johnson had had an outside consulting business for several years. After an investigation by its internal audit department, PG&E concluded that Scott and Johnson were negligent supervisors, and that their outside business had generated conflicts of interest. PG&E then demoted them and reduced their compensation, without considering any responses they may have had to the charges. The jury determined that PG&E had failed to follow its policy, and had wrongfully demoted Scott and Johnson without good cause. It awarded Scott and Johnson $700,000 and $625,000 respectively in economic damages, and $75,000 each for emotional distress. The Supreme Court ruled that the evidence established the breach of an implied in fact agreement not to demote without good cause, under the standards of Foley v. Interactive Data Corp., 47 Cal. 3d 654 (1988). The court recognized a presumption that an employee may be demoted at will. Cf. Cal. Civ. Code sec. 2922. However, it saw no reason that a promise not to demote except for good cause could not become an implied term of an employment contract. It is a question of fact in each case whether the employee reasonably understood that the promise created a contractual obligation. Scott v. Pacific Gas & Electric Co., 11 Cal. 4th 454 (1995). |