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I am on a succession plan to assume my boss' role as "district manager". my sister will then report to me (we presently have lateral roles), there is a policy of family reporting to family, the head office plan is to move my sister to another account. Is that legal? are there options for my sister to remain in her current role?

If there is a policy where family cannot report to family, the company is obligated to make adjustments accordingly. So long as the role, duties and compensation are similar to her current position, this is legal.
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