The California Supreme Court created a right to sue for “wrongful demotion” in breach of a contract to demote only for good cause. In Scott, et al. v. Pacific Gas & Electric Co., two senior managers were disciplined for alleged misconduct by demotions and reductions in their salaries and benefits. The court agreed with the managers’ argument that the employer’s policies, practices and communications created an implied contract not to demote without good cause. Because the employer’s handbook contained a progressive discipline system requiring counseling, oral and written warnings and other disciplinary steps before demotion would occur, the court found a breach of the implied contract not to demote without good cause.1

In general, you can demote an employee for a business reason or as a disciplinary measure, if the demotion does not breach a contract not to demote for any reason. You cannot demote an employee for a discriminatory reason or in retaliation for exercising a legal right. Examples include demoting an employee as a punishment for filing a workers’ compensation claim or demoting only older employees because they have climbed higher in the company’s salary structure and are deemed too expensive.

1. Scott, et al. v. Pacific Gas & Electric Co., 11 Cal. 4th 454 (1995)