In an article first published by Thomson Reuters Accelus, Managing Associate Annabel Mackay examines how far employers have to go when conducting internal investigations. With cost constraints but continuing regulatory scrutiny, financial services employers face difficult decisions when conducting investigations. Given the impact on future career, the highest standards of fairness are expected. Employees who are the subject of such investigations usually have lawyers involved behind the scenes. Those lawyers may encourage their clients to test the fairness of the investigation by requesting electronic searches or interviews of present and former employees. Although co-operation clauses have become increasingly common, no employer relishes the prospect of having to drag former employees (who may have left under a cloud themselves) into a current investigation. How far does an employer have to go when conducting an internal investigation?

The Test

In order to defend an unfair dismissal claim where the reason for dismissal is misconduct, an employer must have a genuine belief in the employee's guilt on reasonable grounds, having carried out a reasonable investigation. The investigation must be sufficient to enable the employee to understand the substance of the allegations.

What is a reasonable investigation?

The nature of the investigation will vary according to the complexity of the issues raised by the employee's misconduct, the state of the evidence and the potential time and expense involved in particular lines of inquiry. In a recent Court of Appeal decision, the employer was not required to investigate every incident and explanation for an employee's inflated mileage claims. The mileage claimed was double the recommended amount and exceeded the sums claimed in previous years. 

The Court of Appeal agreed that the employer was not required to recreate each and every journey to test the employee's position that road-works and parking problems had doubled the mileage. This helpful decision demonstrates that in some cases it may not be reasonable for an employer to examine each and every separate line of defence provided by the employee, although ultimately each case must be assessed on its merits.

Career-long impact?

The level of investigation required will also vary depending on the gravity of the charges. Where the allegations are serious and will have a career-long or reputational impact, the highest standards of fairness are expected and employers must carry out a more detailed investigation.

The approach must be "clear and conscientious" and the employer must look for evidence that will exculpate the employee as well as material that will confirm the allegations. This approach has been followed in cases where the matters being investigated amount to criminal offences or will impact on the employee's ability to secure future employment or even remain in the country. The principle is particularly relevant in the financial services sector where an employee's fitness and propriety may be undermined by disciplinary findings.

Short cuts?

Employers may decide that they would rather short-cut the process and pay the employee the statutory maximum compensation for unfair dismissal, subject to any arguments that procedural unfairness would not have affected the outcome. While this approach has a superficial attraction, it is unlikely to work where the investigation concerns regulatory matters.

If the employer has notified the regulator that the employee has been terminated for misconduct, the employee will not be satisfied with monetary compensation alone. The employer will not be able to amend any filings with the Financial Conduct Authority (FCA), so a deadlock will ensue and the employee may press ahead with their unfair dismissal claim to improve their position with the regulator. 

Scope of the investigation?

If a more detailed investigation is required where the allegations affect an employee's future career, what does this mean in practice? The ACAS Code emphasises that the investigation must be carried out without unreasonable delay so that allegations can be put to the employee before recollections fade. However, where the allegations are particularly serious, does the duty to investigate extend to carrying out a mini electronic disclosure exercise and/or interviewing present and former employees?

An employer must strike a balance between conducting the investigation expeditiously and ensuring that all relevant material is put to the employee. In cases where there may be relevant emails and documents, employers should conduct a targeted search. The employer should also interview relevant witnesses. How long this takes will depend on the period being considered and the complexity of the subject matter.

An employer must keep control over the process so that it does not become unduly protracted, particularly where an employee is suspended. Even where an employee is suspended on full pay, the employee may argue that it is not a neutral act because of the impact of regulatory reporting requirements.  Conversely, an employee faced with the possibility of a significant finding being made against them, which may impact on future career, may invite the employer to extend their enquiries, both in relation to electronic searches or potential witnesses. The employer must approach these requests with an open mind, which would be consistent with the ACAS Code requirement to act with impartiality.

Proportionality

It is important however to remember that this is an internal process and that a sense of proportionality must be maintained. The employer must test the relevance of any search requests to the allegations. Employees sometimes wish to extend the scope of the investigation to matters which have tenuous relevance.

Relevant witnesses must be interviewed but this process does not have to continue once key facts are established. In the mileage case, the employer's investigation was not unfair because it did not contact the local authority to verify the employee's claims about parking difficulties. In another Court of Appeal decision, a dishonesty dismissal was fair where an employer had formed a reasonable view as to the employee's credibility on the primary issue. Having reached that view, the employer was not required to obtain other evidence (such as CCTV footage).

Employers faced with requests to contact former employees will need to assess the extent to which those employees are likely to have evidence pertinent to the investigation. Where former employees are contacted, they must be reminded of their duty of confidentiality and any express requirement to co-operate, whether contained in an incentive plan or a severance agreement.

A question of balance

The question of what ultimately amounts to a reasonable investigation is fact-specific. Employers have to make judgements about the scope at key points in the process. This involves assessing the likelihood of particular lines of enquiry yielding significant results.

As the Employment Appeal Tribunal noted in Santamera v Express Cargo, "the employer has to act fairly, but fairness does not require a forensic or quasi-judicial investigation, for which the employer is unlikely in any event to be qualified, and for which he, she or it may lack the means".

Of course, in the context of financial services sector, arguments regarding resourcing are unlikely to carry much weight but that does not mean that every potential avenue of enquiry must be pursued, regardless of time and expense, or that every single witness must be interviewed where facts are not disputed.

Employers must keep an open mind but a sense of balance must be maintained. Investigations remain an internal process, albeit that some may have longer-term consequences. It is important that staff continue to feel like employees, first and foremost, rather the witnesses or investigation subjects.