Many employment contracts and the majority of the union collective bargaining agreements provide that the employee should not be terminated unless for good cause. It is important to understand what the "good cause" standard exactly means, as the meaning of "good cause" in this instance is quite different from the ordinary meaning of the words "good cause."

In the context of express or implied contracts not to discharge without good cause, "good cause" means "fair and honest reasons, regulated by good faith on the part of the employer, that are not trivial, arbitrary, or capricious, unrelated to business needs or goals, or pretextual. A reasoned conclusion supported by substantial evidence gathered through an adequate investigation that includes notice of the claimed misconduct and a chance for the employee to respond.  

Employee misconduct on the job is, of course, good cause for termination. But employers do not need to prove that the alleged misconduct actually took place. "Good cause" exists if the employer reasonably believed the alleged misconduct took place and otherwise acted fairly.

Several California court cases held that the depressed condition of the employer's business and its decision to reduce its staff with the result that an employee's services are no longer needed is "good cause," for discharging employee. Similarly, sale or divestiture of a portion of the employer's business can be "good cause" for terminating the employees involved. 

However, economic reasons for layoff do not automatically insulate an employer from liability for wrongful termination. Where the employee alleges that he was terminated for unlawful reasons, such as discrimination and retaliation, courts will not accept a reduction in force as the conclusory explanation for the employee's termination.

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