Const. Rob Furlong, a decorated veteran of the war in Afghanistan, was fired last year for urinating on a fellow officer and other misconduct.
The Law Enforcement Review Board ruled in December that the punishment was too harsh and ordered him reinstated with a temporary demotion.
Police Chief Rod Knecht filed an appeal that argued the decision to dismiss Furlong was reasonable.
The Appeal Court, saying the review board made mistakes in its ruling, sent the case back to the board Friday for reconsideration.
"There may be cases where the seriousness of the misconduct, or other relevant factors or the combination of factors, mandate dismissal even if the restoration of the relationship between the officer and the police service might be possible," the justices wrote.
An official with the review board said a hearing will be scheduled as soon as possible to review the case.
Furlong, a former corporal who served with the Edmonton-based Princess Patricia's Canadian Light Infantry, was lauded in 2002 for shooting a Taliban fighter at a range of 2.43 kilometres — the longest sniper kill recorded at the time.
He continues to be suspended from the police service without pay.
In its December ruling, the review board characterized Furlong's conduct during a night of heavy drinking following a police training event as "horseplay" that went too far.
It also noted that Furlong had entered an alcohol treatment facility.
Knecht welcomed Friday's Appeal Court ruling and said he agrees with its findings.
“The citizens of Edmonton and those that visit our city have high standards and expectations of the Edmonton Police Service, and they deserve nothing less," Knecht said in a written statement.
"It is absolutely essential for the Edmonton Police Service to maintain the public trust and confidence of the communities it delivers services to."
The Edmonton Police Association, which represents officers, was reviewing the court ruling and was not available for comment.
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