Driven by the coalescing forces of greater employee willingness to raise grievances, heightened interest from regulators and the desire of employers and shareholders to maintain company reputations and safe working environments, conduct investigations into senior employees are more common than ever before. Against this backdrop, it is crucial that in-house legal teams are aware of both when and how to run an investigation process, as well as the likely ramifications.
When is an external investigation necessary?
Engaging an external investigator to assess allegations against a senior employee shows that the company takes the claims seriously – more seriously than an internal investigation would.
Andrew Taggart, head of UK employment at Herbert Smith Freehills, points out: ‘If allegations have been made against a very senior employee, perhaps even the chair, then there may be a perception that an internally run investigation, even if very thorough, will carry an inherent bias’.
An external investigation can also make sense given that the principle of vicarious liability means that employers are liable for the actions of their employees, Hina Belitz, a partner at Excello Law, says: ‘if a complaint or concern is properly investigated, assessed, and dealt with, it can alleviate liability for an employer should the matter progress to court’.
Belitz gives the example of the ‘reasonable steps defence’ in relation to allegations of sexual harassment, whereby ‘an employer can argue it took all “reasonable steps” to prevent an instance or further instances of harassment taking place.’ An external investigation could be seen as one such reasonable step.
The more serious the allegations, the more important it is that companies take them seriously if they want to avoid further damage to their reputation.
As David Whincup, London labour and employment head at Squire Patton Boggs, comments: ‘[When] credibility, reputation and good faith are at risk, a reasonable investigation is key’. He adds that it is ‘the foundation stone on which all your later decisions rest’.
All three stress that it is paramount to be proactive rather than reactive. One way for in-house teams to do this is to carry out regular workplace culture audits or pulse surveys. These can be used to identify what is working well in the workplace environment and to identify any problems that may exist, which then can be dealt with before an external investigation becomes necessary.
Such an approach can help employees feel safer in the workplace but also help counter a problem now widely recognised across many industries – that of continuing bad conduct that employers were either unaware of or complacent about. As Belitz points out, ‘turning a blind eye to errant senior executives may later result in the company being held up as a public pariah which has let its employees down and enabled the growth of a toxic workplace culture’.
What are the steps involved in launching an investigation?
While investigations are now a regular phenomenon and an integral part of many HR processes, Whincup observes that the investigation has ‘no technical description in employment law, takes no fixed form, is of no set length and requires no formal qualification.’ This relative amorphousness may make investigations appear difficult for in-house teams to approach, but Taggart points to the advantages of ‘flexibility’, so long as ‘the process retains integrity and is fit for purpose’. ‘As the subject matter of investigations varies’, he says, ‘there is no one-size fits all method’.
Frequently, though, an investigation will involve what Taggart refers to as ‘two work streams’ – fact finding and advice. Often, a senior barrister will be appointed to carry out the fact finding, and a law firm’s employment team will then be engaged to advise on the findings.
While both streams could reasonably be handled by the same party, separating them out can help to avoid any impression of a conflict of interest. Whincup suggests that, when considering who to bring in, employers and in-house teams should choose someone with the ‘technical knowledge, confidence and seniority to undertake that process.’
Karen Baxter, head of the investigations and regulatory group at employment specialist Lewis Silkin, says that when deciding to launch an investigation, ‘the first step is not to allow decision paralysis to creep in’. She adds: ‘if no one has prepared for the possibility of needing an investigation there can be a delay of days (even weeks) while the company decides how to act. This delay can be really damaging when it comes to the complainant feeling they are being taken seriously’.
Next, it is key to determine the scope and parameters of the investigation, which can often be set out in a terms of reference document agreed with the parties called in to carry out or advise on the investigation. This will help keep the process focused and prevent the investigation from becoming sprawling and inefficient. Belitz counsels that companies and their in-house teams bear in mind that the level of investigation ‘should be sufficient to enable: (a) the chair of any subsequent disciplinary hearing to form reasonable grounds for believing or disbelieving the allegations against the employee; and (b) the case to be put to the employee [under investigation] in a manner that makes it clear what is being alleged.’
How does the investigative process work?
According to Baxter an investigation typically involves witness interviews, searches of other material evidence, such as emails, documents or phone records, and analysis of these. This could result in the production of a written report or, depending on what is agreed in the terms of reference, an oral assessment of the findings being provided to the company.
Baxter warns: ‘It is important that the organisation does not try to influence the outcome of the investigation or put barriers in the investigator’s way, and that people who might be involved in dealing with the outcome of the report (for example, chairing a later disciplinary hearing) do not allow themselves to get drawn into the investigation as it proceeds.’
Whincup adds that while the investigation is taking place it is important to consider ‘whether anything needs to be said to the complainant or discloser, or to any person who is the subject of the investigation, and potentially whether lawyers and PR teams should be briefed.’
For companies and their HR teams, the work doesn’t end when the investigation finishes. While a company is not bound by recommendations made by an investigator or external legal team, if the investigation finds that material misconduct has taken place, then this must be acted on. Otherwise, as Whincup warns, ‘greater problems and liability for the employer accrue at a later stage’.
Even if an investigation does not identify any misconduct, Whincup advises that the report should still be ‘reasonably acted on with a considered and documented decision that the report does not warrant further action’.
Where misconduct is identified, an investigation may result in serious disciplinary sanctions, including a disciplinary process if an individual is found to have acted improperly. The results of this could include ‘summary termination in the worst cases’, says Taggart. He adds that: ‘from a regulatory perspective, employees might be found not to be fit and proper to perform their roles; which can make it very difficult for someone to find an equivalent job somewhere else, especially if there is a finding as to honesty and integrity’.
Employers in the professional or financial services sectors can make a finding on fitness to work in regulated roles themselves, which will then be passed on to the regulator for ratification.
At the end of any investigation involving a complainant and a person who has been complained about there is always going to be at least one disappointed party, with Baxter pointing out that this will require ‘careful management’.
One way for an in-house team to manage the potential fallout is to consider a settlement agreement. ‘The invitation to a disciplinary hearing’, says Belitz, ‘is often the point at which “without prejudice” settlement discussions begin between the parties. It is compelling for anyone facing disciplinary proceedings, especially a senior executive with much to lose, to consider a quiet departure on mutually agreed terms as an alternative in place of a disciplinary record that would blight their career’.
While this practical advice may be beneficial for the individual, it may not be so good for the wider business. Belitz points to the ‘importance of transparency on a larger commercial scale’, as the impression of a cover up could result in reputational damage, not only in terms of press attention but other ‘ripple effects such as the withdrawal of investment money from the business’. This must remain a vital consideration for in-house teams when deliberating on the nature that any settlement is to take.
Balancing transparency and confidentiality
One vital consideration for in-house teams to think about is that fact finding exercises are often not legally privileged. Therefore, when engaging external counsel for an investigation, it is important to deal with the question of confidentiality versus transparency in the terms of reference document and, from then on, as Whincup advises, for the employer to ‘carry out a reasoned balancing exercise on each separate occasion when the two come into conflict.’
This will involve considering the rights of both complainant and accused. Taggart cautions that ‘while the employer may well think the right course from the outset is to have a written report that everybody can see, it is hard to row back from that if unanticipated findings arise. If there is a material risk that transparency may cause untold damage to the organisation, then uncontrolled publicity may not align with the duty of directors to promote the success of the company in the medium to long term’.
He stresses that this does not mean ‘burying bad news’, but retaining control of its communication and dissemination, and ‘giving yourself time to receive considered recommendations and begin to implement them.’
In regulated industries such as financial services, it will not be possible to retain confidentiality if there are obligations to a regulator. For example, principle 11 of the Financial Conduct Authority handbook dictates that the regulator must be informed of anything of which it would reasonably expect notice. In practice, regulators will often allow the company to arrange an investigation itself, but they will expect to see the findings. An investigation’s findings may also engage criminal law, but it is unusual for matters to be handed over to the police where notification is not mandatory. As Taggart states: ‘a police investigation may be slower due to limited resources and, crucially, at that point you have lost control of the process as an organisation’. Of course, in an instance where the law requires it, such as a finding of fraud, the police must be told straight away.
Even though settlements are still happening, the market is moving away from Non-Disclosure Agreements and the hiding of incidents without taking action. As Taggart says: ‘While some organisations still do it, pretending something did not happen, carrying on as you did before and paying people off is completely contrary to good governance and in conflict with your ESG obligations’.
Baxter concludes that ‘attention has turned not only to the wrongdoer but also to those who could be said to be complicit’. In this context then, it is important for in-house teams to remember that the organisation’s response may itself be placed under the lens of scrutiny.