Investigating Employee Misconduct in Today’s Legal Landscape
The Editor of The Metropolitan Corporate Counsel interviews Scott A. Ohnegian
Editor: Please give some examples of areas in which employee misconduct is receiving a great deal of attention today.
Ohnegian: Allegations of misconduct by upper level management are receiving a great deal more attention than 15 years ago when the focus was on sexual harassment and other types of discrimination. As a result of the public outcry at the shenanigans of executives at Enron and other mismanaged companies, focus has shifted to financial practices and accounting misconduct.
The Sarbanes-Oxley Act has imposed duties on in-house counsel, financial professionals and board members that they did not have ten years ago. With the ensuing legal and regulatory requirements, we are seeing a lot more concerns about actual and potential employee misconduct that cause our clients to reach out to us either to conduct internal investigations or to assist in-house counsel or financial professionals so that they can stay out of trouble.
Initial legislative and regulatory attention has been on publicly traded companies. As attention expands to privately held entities, this trend will continue.
Editor: What steps should an employer take to help avoid bringing a potentially troublesome employee onto the payroll?
Ohnegian: A thorough and detailed employment application is the first step. That doesn't come without pitfalls because an employer cannot ask some questions without running afoul of anti-discrimination, privacy and other laws. The application must be tailored to job-related questions, detailed enough to identify the employee's history and framed to give the employer enough information to conduct an independent investigation post-offer but pre-hire.
In all cases, the investigation should include a reference check. Depending on the circumstances, a credit and a criminal background check are also advisable. If the position requires advanced degrees or involves professional certificates or licenses, the employer should do its due diligence to confirm that the applicant has all the required qualifications.
Before inquiring into an applicant's background, a signed authorization should be obtained to negate any later claim that the employer violated the applicant's privacy rights. Another important point is that an employer should not just get the names of references, they should be called. In addition, every employment application should have a certification by the employee that all of the information that he or she has provided is accurate and truthful. If the employer later discovers that a statement was false and discharges the employee, the certification would help the employer to avoid any liability for wrongful discharge or discrimination.
Editor: Under what circumstances do you recommend that an employer require an employment contract to be signed?
Ohnegian: Individual employment agreements are unusual and generally limited to high-level executives. They are fairly rare because employers do not want to create a situation where they are hiring an employee for a guaranteed period of time as opposed to an employee who can be terminated at will.
If an employee being hired is going to be given access to proprietary or trade secret information, many employers require him or her to sign a confidentiality agreement. Ideally, the confidentiality agreement will be signed by the employee on the first day of hire, and its terms will continue to protect the employer's interest after the employee leaves. Depending on the circumstances, such terms would include a non-compete clause, confidentiality obligation or some sort of post-employment restriction with the appropriate limitations on its duration and scope to help ensure their enforceability.
Editor: Why is it important to identify the governing law in an employment contract?
Ohnegian: Absent an employment contract dictating which state's laws will apply to an employment relationship, courts will most likely apply the law of the state in which the employee works. I have been involved in several law suits where the threshold issue was whether New York or New Jersey law would apply. Under New York law the employee would have no claim, but under New Jersey law there would be a claim.
One case involved choice of law principles related to public policy, rather than an employment agreement, where the employee claimed protection under the New Jersey Conscientious Protection Act (CEPA), which is a state whistleblower law. The New York whistleblower law requires that the public safety, health or welfare be involved for an employee to be able to seek redress. The New Jersey statute does not. With many employees living in one state and working in another, choice of law disputes are not uncommon.
Editor: How can personnel policies and employee handbooks help set the stage for investigations of employee misconduct?
Ohnegian: Personnel policies and employee handbooks need to be widely distributed and uniformly enforced. More and more, regardless of their size, companies are posting their personnel policies online. The electronic medium makes it easy to update policies and to prove that employees have received them by providing an automated e-receipt acknowledgement.
Policies and handbooks should contain a detailed complaint procedure and identify the contact to whom complaints should be made. Typically, a human resources individual is the contact for fielding complaints not just about harassment or discrimination but also workplace violence or other violations of company policy of which employees become aware.
The policies and handbooks should also describe the procedures that will be followed in investigating allegations of employee misconduct. The procedures should be periodically updated to comply with any changes in the applicable law, although clear guidance from the state authorities sometimes is unavailable. For example, the New Jersey legislature recently amended CEPA to require employers to provide annually to their employees a notice of their rights under the whistleblower statute and to encourage them that, if they become aware of an employer policy or practice which they believe is against public policy, they should bring it to the attention of management. The state's Department of Labor has promised that the required form of the notice is going to he forthcoming, but as of the date of our interview, it has not yet been issued.
Editor: How can the attorney-client privilege be preserved when investigating employee misconduct?
Ohnegian: When outside counsel is retained by an audit committee of the board of directors, conversations between outside counsel and the company's general counsel may or may not be protected by the attorney-client privilege depending on their substance. In Payton u New Jersey Turnpike Authority, 148 N.J. 524, 691 A.2d 321 (N.J. 1997), a case involving an in-house investigation of a claim of sexual harassment, the New Jersey Supreme Court ordered much of the materials gathered in the investigation to be turned over to plaintiff's counsel. The court distinguished a factual investigation conducted by a lawyer from the legal opinions stemming from the lawyer's factual findings. Whether outside or in-house counsel, the investigating lawyer needs to be careful to segregate the facts from the legal opinions so that if a discovery battle does occur, there is a reasonable basis to draw the line between that which is discoverable and that which is not.
Editor: When allegations of financial improprieties are brought to the attention of the board, why is it in the board's best interest to retain outside counsel totally separate from the company's regular counsel?
Ohnegian: Retention of independent counsel tends to defeat the inference that the counsel might have a financial interest in reaching a certain decision. In addition, the attorney who performs an internal investigation could end up being a witness in the subsequent litigation and ethically precluded from also acting as trial counsel. To enable the company to retain its regular counsel in some future litigation, it is in the client's best interest to have a neutral third party conduct the investigation.
Editor: How have whistleblower statutes impacted an employer's investigation of employee misconduct?
Ohnegian: Employers must take seriously the issues raised by their employees. They cannot simply sweep an employee's concerns under the rug by removing the "problem" employee. An employee's concerns should be investigated thoroughly with the investigation documented and the results communicated to the employee who raised the concern. Where appropriate, those who have committed acts of misconduct should be disciplined.
Editor: How has today's communications environment impacted investigations of employee misconduct?
Ohnegian: Employees' use of the Internet and emails fits into all the topics you and I have discussed. When online, people are incredibly loose with their language, even sophisticated people. In most commercial and legal contexts, emails have the same effect as a letter on company letterhead. Very few people seem to take that fact seriously.
Companies in employment disputes benefit when they can identify problem employees through the emails they have sent. On the other hand, their cases are hurt when trying to discipline employees who have accessed inappropriate Internet sites or circulated blatantly inappropriate emails if electronic records show that others within the corporate structure above them are doing the same thing.
Every company needs to have a computer usage policy informing its employees of the appropriate use of the computer. In addition, employees should be required to sign an acknowledgement that they are aware that their use of the company's computer can be monitored by the company and that they have no expectation of privacy related to such use.
One of the first places you look now in any internal investigation of employee misconduct is the computers. What starts out as a financial investigation can turn into an investigation revealing all sorts of other inappropriate emails. The best course of action is to get the message out to employees that they should not put anything into entail that they do not want to read in the headlines of the next edition of the evening news or to be asked to explain on a witness stand.