C. Byron Scott and Al Johnson were engineers employed by Pacific Gas and Electric Company (PG&E) in a senior managerial capacity when they were demoted. The demotion resulted in an approximately 25 percent reduction in salary and benefits, as well as a loss of all supervisorial authority. They sued, claiming, among other things, that PG&E had breached an implied-in-fact contract term not to demote their employees except for good cause. The jury, in special findings, found in fact that such a contract existed and had been breached, and awarded each plaintiff a substantial amount in compensatory damages for past and anticipated future lost earnings. The trial court entered judgment for Scott and Johnson, but the Court of Appeal reversed, holding that courts should not recognize or enforce such agreements for various reasons of law and public policy. Because the Court of Appeal's conclusion contravenes well-established principles of law relating to employment contracts recognized in Foley v.
At the time of trial Scott and Johnson had been employed by PG&E as engineers for 24 years and 20 years, respectively. Both had worked, before they were demoted, in PG&E's technical and ecological services unit (TES), an in-house engineering consulting service for other departments within PG&E. Scott had been director of technical services, directly below the head of the TES division, and had supervisory responsibility for 250 employees. Johnson was a supervisory engineer immediately below Scott, and supervised 56 employees.
In 1979, Scott and Johnson started S&J Engineering (S&J), a subchapter S corporation. The company consults on stress analysis, installation of strain gauges, and performs installation and calibration services. Ray Cayot, Carl Weinberg, and R.C. Thornberry, the successive managers of TES, were all informed of the existence of the company. Scott's and Johnson's involvement with S&J was well known throughout PG&E. A copy of Johnson's S&J corporate stock certificate hung on his office wall at PG&E. Employment policies at TES permitted outside consulting work, and several engineers in TES owned outside businesses. There is no PG&E rule, practice, or policy which prohibits company employees from engaging in outside businesses so long as such activity does not precipitate a conflict of interest with PG&E.
Work was done for S&J in the evenings, on vacation days and on the weekends. Much of the work was performed in Johnson's home. Some jobs were more extensive and were done on location, such as projects undertaken for the NASA Ames Research facility at Moffett Field. Some technicians who worked with Scott and Johnson at PG&E were employed on S&J's NASA projects, but they performed this work during their off hours. There is no company policy against PG&E employees hiring fellow employees in their outside businesses.
Near the end of 1988, PG&E's internal auditing department (IA) began investigation into Scott's and Johnson's supervisorial practices and outside business interests. There are conflicting explanations as to why the investigation commenced. PG&E claimed that an investigation of time card fraud earlier that year among some technicians in Scott's and Johnson's department had pointed to irregularities in their conduct. Scott and Johnson
The charges that finally emerged from the investigation fell into two categories: (1) Scott and Johnson were negligent supervisors, failing to establish controls on employee abuses of such matters as overtime work and expense account reimbursement; (2) Scott's and Johnson's dual positions as the proprietors of S&J and as PG&E employees gave rise to a number of conflicts of interest that they resolved to PG&E's disadvantage. They were accused of using their influence to have PG&E hire and promote persons who had been employed by S&J, and also of favoring PG&E vendors who had referred business to S&J. They were also accused of misleading PG&E about the nature of S&J's activities.
On August 9, 1989, Scott and Johnson were suspended with only a brief explanation of the charges against them. They were finally permitted, on September 6, 1989, to read the IA report outlining the charges, but were not allowed to obtain copies of it. They were given three days to respond to the charges. This they did at length, and with extensive documentary support. They contended that they had used only established supervisorial practices in monitoring their employees, and that they had not, in fact, shown any favoritism toward PG&E employees or vendors. In spite of this response, Scott and Johnson were demoted in October of 1989. At trial, personnel supervisors testified that the decision to demote them had been made in July of 1989, and that their response to the IA report had not been considered in that decision. They were placed in positions they last held in 1975 and 1973 respectively, and were relieved of all supervisory authority. Their salaries and benefits were accordingly reduced by approximately 25 percent.
Scott and Johnson sued, alleging among other matters that PG&E had breached an implied contract term not to demote employees without good cause.
Termination occurs when "Positive Discipline has failed to bring about a positive change in an employee's behavior." Termination may also occur immediately "in those few instances when a single offense of such major consequence is committed that the employee forfeits his/her right to the Positive Discipline process," such as theft or striking a member of the public. The system is applied to all nonprobationary employees. Demotion is discussed as an intermediate disciplinary step short of discharge, particularly appropriate when the employee shows an "ability deficiency."
There was uncontradicted evidence introduced at trial that PG&E intended to bind itself to these disciplinary policies. First, the policy manual itself, of which Scott and Johnson had knowledge, enunciates the principle that the disciplinary process is intended to be uniformly applied to all employees. Second, the testimony of one of PG&E's personnel managers affirmed that PG&E expected "employees to rely on company [discipline] policies as being what the company will follow," and that one of the purposes of the disciplinary process is to "let employees know what the company expects and what employees can expect from the company." No evidence was produced that suggested the disciplinary policy was followed merely at the discretion of PG&E management.
Scott and Johnson argued at trial that PG&E had not followed its own personnel policies when it summarily demoted them without cause. The testimony of a number of witnesses showed that Scott and Johnson had not, in fact, been responsible for any favorable treatment of PG&E employees who had been employed by S&J, and that PG&E managers were unable to point to any specific instance of Scott's and Johnson's acting on a conflict of
The jury, in special findings, found as a fact that there had been an implied contractual agreement between PG&E and Scott and Johnson not to demote without good cause, and that PG&E had breached that agreement. They awarded Scott and Johnson $700,000 and $625,000, respectively, in economic damages for past and anticipated future lost earnings from the decreased salary and benefits as a result of the demotion, and $75,000 each in noneconomic damages for emotional distress.
A divided Court of Appeal originally affirmed the judgment of the trial court, but on rehearing reversed. The court found a contract action for "wrongful demotion" to be inherently vague. The court also took the position that judicial involvement in employment decisions short of employee termination would create uncertainty and an unacceptable degree of intrusion into the employer-employee relationship. We granted review on the issue of whether courts may enforce implied contract terms not to demote without cause.
In the employment context, the application of this realistic approach to contract interpretation means that courts will not confine themselves to examining the express agreements between the employer and individual employees, but will also look to the employer's policies, practices, and communications in order to discover the contents of an employment contract. Thus, when considering a contractual wrongful termination claim, for example, "the trier of fact can infer an agreement to limit the grounds for termination based on the employee's reasonable reliance on the company's personnel manual or policies." (Foley, supra, 47 Cal.3d at pp. 681-682.) Enforceable expectations of employment security may also be inferred from the "`actions or communications by the employer reflecting assurances of continued employment,'" as well as from other relevant circumstances such as longevity of service and industry practice. (Foley, supra, 47 Cal.3d at p.
The principle that implied employment contract terms may arise from the employer's official and unofficial policies and practices is one that long predates Foley, and has not been confined to the area of wrongful termination. As the court stated in Chinn v. China Nat. Aviation Corp. (1955) 138 Cal.App.2d 98 [291 P.2d 91], in rejecting an argument that an employer's policy to pay severance benefits was a gratuitous, unenforceable promise rather than a contractual obligation: "Of late years the attitude of the courts (as well as of employers in general) is to consider regulations of this type which offer additional advantages to employees as being in effect offers of a unilateral contract which offer is accepted if the employee continues in the employment, and not as being mere offers of gifts." (Id. at pp. 99-100; see also Newberger v. Rifkind (1972) 28 Cal.App.3d 1070, 1076 [104 Cal.Rptr. 663, 57 A.L.R.3d 1232] [implied unilateral contract for stock option agreement]; Hunter v. Sparling (1948) 87 Cal.App.2d 711, 721-722 [197 P.2d 807] [enforceable promise to pay pension benefits inferred from personnel policies].) In Hepp v. Lockheed-California Co. (1978) 86 Cal.App.3d 714 [150 Cal.Rptr. 408], this reasoning was extended to policies regarding nonmonetary employment benefits. There the court held that it was a question of fact whether an employer's policy of preferential hiring for its laid-off employees was to be considered an implied contractual promise on which its employees could reasonably rely. (Id. at p. 719.)
There is, of course, a strong common law presumption that an employee may be demoted at will. Since it is presumed that an employee may be
PG&E contends that in the present case there was insufficient evidence from which to conclude that it had entered into an implied contractual agreement not to demote its employees without cause. We disagree.
There was also unquestionably substantial evidence to support the conclusion that PG&E breached the implied contract not to demote without good
Our inquiry would normally end here. But PG&E raises several legal and policy arguments why courts should not enforce contracts, or at least implied-in-fact contracts, that would restrict an employer's ability to demote an employee at will. It is to these contentions that we now turn.
PG&E advances essentially three arguments, all of which were relied on by the Court of Appeal, why contractual agreements that limit an employer's ability to demote at will should not be enforced. As will appear, we find that none of PG&E's contentions withstand scrutiny.
The Ladas court thus applied the well-established principle that "`[a]lthough the terms of a contract need not be stated in the minutest detail, it is requisite to enforceability that it must evidence a meeting of the minds upon the essential features of the agreement, and that the scope of the duty and limits of acceptable performance be at least sufficiently defined to provide a rational basis for the assessment of damages....'" (Robinson & Wilson, Inc. v. Stone (1973) 35 Cal.App.3d 396, 407 [110 Cal.Rptr. 675].) It is unquestionably true, as Ladas demonstrates, that a number of promises made in the employment relationship are too vague to be enforceable. But PG&E does not explain how that principle applies to the promise at issue here. Once the trier of fact determines that there is an implied agreement not to demote without good cause, its inquiry into whether "good cause" exists is virtually identical to the inquiry it would be called on to make in the wrongful discharge context and in a host of other contractual settings. The term "good cause" "[e]ssentially ... connote[s] `a fair and honest cause or reason, regulated by good faith on the part of the party exercising the power'" (Pugh v. See's Candies, Inc. (1981) 116 Cal.App.3d 311, 330 [171 Cal.Rptr. 917]), as opposed to one that is "trivial, capricious, unrelated to business needs or goals, or pretextual...." (Wood v. Loyola Marymount University (1990) 218 Cal.App.3d 661, 670 [267 Cal.Rptr. 230]; see also Walker v. Blue Cross of California (1992) 4 Cal.App.4th 985, 994-995 [6 Cal.Rptr.2d 184]; Pugh v. See's Candies, Inc. (1988) 203 Cal.App.3d 743, 769-770 [250 Cal.Rptr. 195].)
Moreover, PG&E's discipline policies not only provided an implied good cause standard for demotion, but also a detailed set of rules and procedures for governing the imposition of discipline that further defined the meaning of that standard. These rules and procedures were sufficiently clear to permit a trier of fact to determine whether the company had complied with them.
Accordingly, PG&E's implied promise not to demote without good cause and to follow certain disciplinary rules was not unenforceably vague.
Second, PG&E argues that its position is supported by our recent statement in Turner v. Anheuser-Busch, Inc. (1994) 7 Cal.4th 1238, 1247 [32 Cal.Rptr.2d 223, 876 P.2d 1022] (Turner) that "a poor performance rating or demotion, even when accompanied by a reduction in pay, does not by itself trigger a constructive discharge." (Fn. omitted; see also Gibson v. Aro Corp. (1995) 32 Cal.App.4th 1628, 1635 [38 Cal.Rptr.2d 882] [employee's demotion does not constitute constructive discharge]; Soules v. Cadam, Inc.
Turner, however, is inapposite. As discussed in that case, the doctrine of constructive discharge evolved as a means of preventing employers from making an "`end run' around wrongful discharge and other claims requiring employer-initiated terminations of employment." (Turner, supra, 7 Cal.4th at p. 1244.) Courts have recognized that a constructive discharge occurs when an employer "`purposefully creates working conditions so intolerable that the employee has no option but to resign....'" (Id. at p. 1245, quoting Sure-Tan, Inc. v. NLRB (1984) 467 U.S. 883, 894 [81 L.Ed.2d 732, 744, 104 S.Ct. 2803]; italics in Turner omitted.) Those who sue for constructive discharge seek the same contract damages available to those who have suffered a conventional wrongful termination, i.e., the entire amount of salary that would have been earned, including reasonably anticipated future earnings, less the amount that has been earned or might reasonably have been earned from other employment. (See Parker v. Twentieth Century Fox-Film Corp. (1970) 3 Cal.3d 176, 181 [89 Cal.Rptr. 737, 474 P.2d 689, 44 A.L.R.3d 615]; Drzewiecki v. H & R Block, Inc. (1972) 24 Cal.App.3d 695, 705 [101 Cal.Rptr. 169].)
In the present litigation, in contrast, Scott and Johnson did not quit, and do not claim that they were constructively discharged. The damages they sought were accordingly more modest — not the past and anticipated loss of their entire salary, but merely the difference in compensation before and after the demotion.
Here, too, we do not find implied contract terms to demote employees only for good cause "so inherently harmful to employers that they should not be enforced." On the contrary, according to the testimony at trial of one of PG&E's human resources managers, PG&E created a comprehensive system of positive discipline in order to more effectively manage the company, create a more efficient and independent workforce, and protect employees against the arbitrary actions of supervisors. There appears to be, indeed, widespread support among scholars and practitioners in the field of human resources management for the position that employee discipline should be governed by basic principles of due process. (See, e.g., Redeker, Employee Discipline: Policies and Practices (1989) pp. 106-124 (Redeker); Belohlav, Realities of Successful Employee Discipline (Mar. 1983) 28 Personnel Administrator 74; Discenza & Smith, Is Employee Discipline Obsolete? (June 1985) 30 Personnel Administrator 175, 177-178; Heshizer & Graham, Discipline in the Nonunion Company: Protecting Employer and Employee Rights (Mar.-Apr. 1982) 59 Personnel Administrator 71, 77-78; Levy, Discipline for Professional Employees (Dec. 1990) Personnel J. 27, 28; Employee Discipline: Written Guidelines Protect Employees and Management (Oct. 1987) Small Bus. Rep. 37, 37-38.) One commentator has outlined four advantages that a corporation may derive from incorporating such due process into the disciplining of its employees: (1) a more productive, responsible work force
Whatever the benefits or detriments of adopting a disciplinary system governed expressly or implicitly by some sort of rule of law, we cannot say that an employer's voluntary commitment to such a policy is contrary to public policy. Nor can we say that it is against public policy to apply ordinary rules of contract interpretation to determine whether these disciplinary procedures have become implied terms of the employment contract.
PG&E claims in effect that even if the enforcement of an implied agreement governing employee demotion is not, in itself, so inherently harmful to the employer as to be contrary to public policy, the recognition of wrongful demotion actions will inevitably open the door to lawsuits concerning a whole host of lesser employment decisions, leading to excessive involvement of courts and juries in the workplace. PG&E cites our observation in Cole v. Fair Oaks Fire Protection Dist. (1987) 43 Cal.3d 148, 160 [233 Cal.Rptr. 308, 729 P.2d 743] that "every employer must on occasion review, criticize, demote, transfer and discipline employees." It then argues that if we do not draw the line at wrongful termination, and recognize an implied contract action based on lesser employee grievances such as wrongful demotion, then "every act or omission regarding performance evaluations, promotions, transfers, or other perquisites would be subject to judicial determination as to whether the policy or practice at issue contained an implied `good cause' promise," which would lead to a judicial "invasion into the employers' exercise of managerial discretion."
PG&E appears to argue implicitly that courts should engage in a kind of balancing of the employer's and the employee's interests to determine
The fallacy behind this argument is basic.
Second, as suggested above in the discussion of Ladas, supra, the doctrine of unenforceability of indefinite promises will likely eliminate many employment contract claims that would involve courts in the micromanagement of the workplace. The utility of this doctrine is further illustrated by Rochlis v. Walt Disney Co. (1993) 19 Cal.App.4th 201 [23 Cal.Rptr.2d 793]. In that case, the court concluded that promises allegedly made to a former senior executive for the Walt Disney Company that he was to receive "reasonable salary increases" and "reasonable annual bonuses," and would "actively and meaningfully participate in all ... creative activities" of the department to which he was assigned were not cognizable as contract claims: "Assuming such commitments were made, they are simply too vague and indefinite to be enforceable. For example, promises to pay salary increases which are `appropriate' to [the plaintiff's] responsibilities and performance or that [the
Finally, we find implausible PG&E's claim that employees will bring their employers to court over the more minor matters that PG&E predicts — such as changes in work rules, reprimands or other intermediary forms of discipline — for the simple reason that in such cases, even if the promises are sufficiently definite to permit enforcement, courts will be unable to grant any significant relief. An employer's alleged violation of these minor contract terms will likely not give rise to ascertainable damages.
For all of the foregoing, the judgment of the Court of Appeal is reversed and remanded with directions to reinstate the judgment of the trial court.
Lucas, C.J., Kennard, J., Arabian, J., George, J., Puglia (Robert K.), J.,
Additionally, the jury returned a favorable verdict on plaintiffs' alternate theory of recovery that PG&E had violated its duty of good faith and fair dealing. We also do not address that claim. Since breach of the implied-in-law covenant of good faith claim is basically a contract claim (Foley, supra, 47 Cal.3d at p. 700), the former claim only becomes an issue when there is insufficient evidence to find an implied-in-fact contract not to terminate or demote. In this case, we are not called on to decide what independent significance a good faith covenant claim may have, since the jury found that there was an implied-in-fact agreement not to demote.
However, Michigan Courts of Appeals appear divided on the question of wrongful demotion. At least one court has held that a wrongful demotion in violation of company policy was a viable cause of action, which the court characterized as a "wrongful termination" from the job from which the employee had been demoted. (Richards v. Detroit Free Press (1988) 173 Mich.App. 256 [433 N.W.2d 320, 322], remanded on other grounds (1989) 433 Mich. 913 [448 N.W.2d 351].) Another court held, without explanation, that the Michigan Supreme Court's holding in Toussaint did not apply to wrongful demotions. (Fischhaber v. Gen. Motors Corp. (1988) 174 Mich.App. 450 [436 N.W.2d 386, 389].)