Trouble using ROW_NUMBER() OVER (PARTITION BY ...)

I would do something like this:

;WITH x 
 AS (SELECT *, 
            Row_number() 
              OVER( 
                partition BY employeeid 
                ORDER BY datestart) rn 
     FROM   employeehistory) 
SELECT * 
FROM   x x1 
   LEFT OUTER JOIN x x2 
                ON x1.rn = x2.rn + 1 

Or maybe it would be x2.rn - 1. You'll have to see. In any case, you get the idea. Once you have the table joined on itself, you can filter, group, sort, etc. to get what you need.

A bit involved. Easiest would be to refer to this SQL Fiddle I created for you that produces the exact result. There are ways you can improve it for performance or other considerations, but this should hopefully at least be clearer than some alternatives.

The gist is, you get a canonical ranking of your data first, then use that to segment the data into groups, then find an end date for each group, then eliminate any intermediate rows. ROW_NUMBER() and CROSS APPLY help a lot in doing it readably.

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EDIT 2019:

The SQL Fiddle does in fact seem to be broken, for some reason, but it appears to be a problem on the SQL Fiddle site. Here's a complete version, tested just now on SQL Server 2016:

CREATE TABLE Source
(
  EmployeeID int,
  DateStarted date,
  DepartmentID int
)

INSERT INTO Source
VALUES
(10001,'2013-01-01',001),
(10001,'2013-09-09',001),
(10001,'2013-12-01',002),
(10001,'2014-05-01',002),
(10001,'2014-10-01',001),
(10001,'2014-12-01',001)


SELECT *, 
  ROW_NUMBER() OVER (PARTITION BY EmployeeID ORDER BY DateStarted) AS EntryRank,
  newid() as GroupKey,
  CAST(NULL AS date) AS EndDate
INTO #RankedData
FROM Source
;

UPDATE #RankedData
SET GroupKey = beginDate.GroupKey
FROM #RankedData sup
  CROSS APPLY 
  (
    SELECT TOP 1 GroupKey
    FROM #RankedData sub 
    WHERE sub.EmployeeID = sup.EmployeeID AND
      sub.DepartmentID = sup.DepartmentID AND
      NOT EXISTS 
        (
          SELECT * 
          FROM #RankedData bot 
          WHERE bot.EmployeeID = sup.EmployeeID AND
            bot.EntryRank BETWEEN sub.EntryRank AND sup.EntryRank AND
            bot.DepartmentID <> sup.DepartmentID
        )
      ORDER BY DateStarted ASC
    ) beginDate (GroupKey);

UPDATE #RankedData
SET EndDate = nextGroup.DateStarted
FROM #RankedData sup
  CROSS APPLY 
  (
    SELECT TOP 1 DateStarted
    FROM #RankedData sub
    WHERE sub.EmployeeID = sup.EmployeeID AND
      sub.DepartmentID <> sup.DepartmentID AND
      sub.EntryRank > sup.EntryRank
    ORDER BY EntryRank ASC
  ) nextGroup (DateStarted);

SELECT * FROM 
(
SELECT *, ROW_NUMBER() OVER (PARTITION BY GroupKey ORDER BY EntryRank ASC) AS GroupRank FROM #RankedData
) FinalRanking
WHERE GroupRank = 1
ORDER BY EntryRank;

DROP TABLE #RankedData
DROP TABLE Source