The officers say the policy in Houston, Texas, banning beards and goatees is unfair for men with a skin condition that reacts to shaving.
The condition, pseudofolliculitis barbae, primarily affects black men and can cause severe irritation, rashes and ingrown hair.
Houston police said the ban was adopted in 2005 because officers with facial hair cannot properly seal gas masks in the event of bioterrorism attacks.
The lawsuit filed Tuesday says the men were reassigned to plainclothes duty because of their facial hair. Sgts. Shelby Stewart and Kenneth Perkins said they have goatees because of the skin condition.
"When they took us out of uniform and told us we couldn't work second jobs in uniform, that meant that we had to take a financial hit that most officers would not take," said Stewart, a 26-year department veteran.
"That actually makes me feel as though a family member just slapped me in the face," said Sgt. Perkins, according to CBS affiliate KHOU-TV.
Craig Ferrell, a lawyer for Houston police, denied any discrimination but said the policy will be changed. Officers who cannot shave would use special gas masks that that can be worn over a beard, he said.
Also, officers who cannot shave due to medical conditions may be assigned to plainclothes duties, but they must submit a written report from a physician every 30 days, reports KHOU.
Officers Adrian White and Raul Collins are also plaintiffs in the lawsuit. The City of Houston is also named as a defendant.
The lawsuit alleges diminished status and pay because of the policy, but Ferrell said the reassignments were not demotions.
"I hope the citizens of Houston want an officer out there when we call the police, and I don't care if he has a beard," attorney Jolanda Jones said, according to KHOU. "I really don't. I just want to make sure I'm safe."