Scott v. Pacific Gas & Electric Co.
11 Cal. 4th 454, 904 P.2d 834, 46 Cal. Rptr. 2d 427 (1995)
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Rule of Law:
An employer's implied-in-fact promise not to demote an employee without good cause is an enforceable contract term, similar to an implied promise not to terminate without good cause.
Facts:
- C. Byron Scott and A1 Johnson were senior managerial engineers who had been employed by Pacific Gas and Electric Company (PG&E) for 24 and 20 years, respectively.
- In 1979, with the knowledge of their PG&E managers, Scott and Johnson started their own outside engineering consulting business, S&J Engineering (S&J).
- PG&E had a detailed personnel policy known as 'Positive Discipline,' which outlined a system of progressive, corrective discipline for all nonprobationary employees and was intended to be applied uniformly.
- In late 1988, PG&E's internal auditing department began an investigation into Scott and Johnson, alleging negligent supervision and conflicts of interest related to their management and their ownership of S&J.
- In August 1989, Scott and Johnson were suspended.
- In October 1989, PG&E demoted Scott and Johnson to non-supervisory positions they last held in the 1970s, resulting in a 25 percent reduction in salary and benefits.
- Evidence suggested the decision to demote the employees was made before they were given an opportunity to formally respond to the charges against them.
Procedural Posture:
- C. Byron Scott and A1 Johnson sued Pacific Gas and Electric Company (PG&E) in a California superior court (trial court) for breach of an implied contract not to demote without good cause.
- A jury returned a special verdict in favor of Scott and Johnson, finding an implied contract existed and had been breached, and awarded them substantial compensatory damages.
- The trial court entered judgment for the plaintiffs.
- PG&E, as appellant, appealed the judgment to the California Court of Appeal.
- The Court of Appeal, as the intermediate appellate court, reversed the trial court's judgment, holding that a claim for wrongful demotion in breach of an implied contract was not legally cognizable.
- The California Supreme Court granted review of the case.
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Issue:
Does an employer's implied-in-fact promise not to demote an employee without good cause, based on its personnel policies and practices, create an enforceable contract term?
Opinions:
Majority - Mosk, J.
Yes. An employer’s policy that its employees will not be demoted except for good cause can become an enforceable, implied term of an employment contract. The court's reasoning extends the principles established in Foley v. Interactive Data Corp., which recognized implied contracts not to terminate without good cause. There is no conceptual reason to treat a promise regarding demotion differently from promises regarding termination, severance pay, or other employment benefits. The common law presumption of at-will employment, which applies to demotions as well as terminations, can be rebutted by evidence of a contrary agreement arising from the employer's policies and practices. PG&E's detailed 'Positive Discipline' system, combined with testimony that the company intended employees to rely on it, provided compelling evidence of an implied agreement to demote only for good cause. The court rejected PG&E’s policy arguments that such claims are too vague to enforce, would undermine the doctrine of constructive discharge, or would lead to excessive judicial intervention in the workplace. The court reasoned that the 'good cause' standard is well-established, traditional contract law principles (like unenforceability of vague promises and limitations on damages) would prevent a flood of litigation over minor grievances, and employers retain the ability to control their contractual obligations through clear policies and disclaimers.
Analysis:
This decision significantly broadened the scope of implied-in-fact contract claims in California employment law, extending the protections previously recognized for wrongful termination in Foley to lesser disciplinary actions like demotion. The case established that detailed personnel policies regarding discipline can create legally binding obligations that limit an employer's discretion. As a result, employers must be more cautious in drafting employee handbooks and manuals, as their stated procedures may be interpreted as enforceable promises. The ruling reinforces the principle that courts will look to the totality of the circumstances to determine the actual agreement between an employer and employee, giving legal weight to company practices and policies that create reasonable employee expectations.
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