Employee Rights: The US Perspective

37.1 Introduction

Unless required to by contract or subpoena, employees and former employees may decline to provide information or documents in connection with a corporate investigation. However, many employers will insist on employee co-operation and may impose disciplinary measures – up to and including termination – on those employees who refuse. In the absence of contractual protections, employees may have no legal right to refuse to submit to an interview, even if their answers tend to incriminate them. A 2016 decision from the United States Court of Appeals for the Second Circuit in Gilman v. Marsh & McLennan Companies, Inc^[2] is instructive. There, two employees argued that Marsh & McLennan’s demand they submit to an interview in an internal investigation constituted state action that infringed their right against self-incrimination. The court rejected this argument, calling it ‘the legal equivalent of the “Hail Mary pass” in football’.^[3]

Although employees generally cannot refuse to participate in investigations without risking their employment, they do possess various rights implicated by corporate investigations. The sources of those rights include the employer and federal and state law. With respect to the employer, many companies have policies and procedures for internal investigations. For instance, employee handbooks, company by-laws, written guidelines and employment agreements often contain provisions regarding employee data and document collection, workplace searches, communication monitoring, privacy and confidentiality. These documents may also provide guidance on an employee’s right to indemnification for legal fees expended during an investigation or related proceedings. In addition, many companies maintain written policies that protect employees from retaliation for participating in an investigation. These documents, and unwritten, established company procedures, should be considered to understand the protection afforded to employees in an investigation.

Federal and state law also govern the rights of employees involved in investigations. These rights, discussed below, can be divided into four general categories: (1) the right to be free from retaliation; (2) the right to representation; (3) the right to privacy; and (4) the right to indemnification.

37.2 The right to be free from retaliation

Although employees generally have no right to refuse to participate in a corporate investigation, they may be protected from retaliation. A number of federal employment statutes prohibit retaliation against employees who participate in corporate investigations.^[4] State and local laws provide similar protection.

Moreover, employees who possess information regarding corporate misconduct have some leverage in that they may become whistleblowers, who are protected from retaliation under federal^[5] and state whistleblower laws.^[6]

The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) provides for both civil and criminal penalties for employers who retaliate against whistle­blowers. Section 806 of the law governs civil penalties. It prohibits publicly traded companies from retaliating against employees who assist or provide information to law enforcement, Congress, or ‘a person with supervisory authority over the employee’ regarding activity the employee reasonably believes is a violation of: (1) federal law regarding mail, wire, securities, or bank fraud; (2) an SEC rule or regulation; or (3) any provision of federal law relating to fraud against shareholders.^[7]

Section 1107 of Sarbanes-Oxley provides for criminal penalties for retaliation against whistleblowers. Specifically, it criminalises ‘[w]hoever knowingly, with the intent to retaliate, takes any action harmful to any person, including interference with the lawful employment or livelihood of any person, for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any Federal offense’.^[8]

Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) provides anti-retaliation protection for whistleblowers who report possible securities law violations to the Securities and Exchange Commission (SEC).^[9] Similarly, Section 748 of Dodd-Frank protects whistle­blowers who report violations of the Commodity Exchange Act to the Commodities Futures Trading Commission.^[10] And Section 1057, which codifies the Consumer Financial Protection Act of 2010, forbids retaliation against employees who blow the whistle on possible violations of that statute.^[11]

Despite their similarities, there are important differences between the whistleblower protections contained in Sarbanes-Oxley and Dodd-Frank. Procedurally, in contrast to Sarbanes-Oxley’s requirement that complaints be filed with the Department of Labor within 180 days of the retaliatory act or the complainant’s discovery of the retaliation,^[12] Dodd-Frank permits an employee to bring a private cause of action directly, without having to go through an administrative agency,^[13] and allows the employee to do so within six to 10 years, depending on the circumstances.^[14] In addition, Dodd-Frank provides more attractive financial incentives for whistleblowers. A whistleblowing employee who prevails under Dodd-Frank may receive up to twice the amount of wages lost due to retaliation, as well as attorneys’ fees.^[15]

Under Sarbanes-Oxley, by contrast, a whistleblower’s recovery is limited to the ‘relief necessary to make the employee whole’, including reinstatement, back pay, ‘special damages’ (which includes damages for non-economic harm such as reputational injury, mental anguish and suffering), attorneys’ fees and costs.^[16]

Critically, however, whereas Sarbanes-Oxley protects employees who report concerns to supervisors at their company, Dodd-Frank does not. Dodd-Frank defines ‘whistleblower’ to mean a person who provides ‘information relating to a violation of the securities laws to the Commission’.^[17]

37.3 The right to representation

Employees have no automatic right to counsel during an internal investigation,^[18] unless contractually provided under the terms of their employment.^[19] Nonetheless, employees may choose to retain counsel, particularly if they face liability.

Concerns over individual criminal liability have increased since September 2015, when then Deputy Attorney General Sally Yates issued a memorandum titled ‘Individual Accountability for Corporate Wrongdoing’. The Yates Memorandum stressed the importance of combating corporate misconduct by holding individuals accountable. It listed six steps that should be part of all investigations and prosecutions of corporate misconduct, the first of which is that a corporation’s eligibility for co-operation credit depends on it providing the Department of Justice (DOJ) with all relevant facts about the individuals involved in the alleged misconduct. The Yates Memorandum also stated that all investigations must focus on individuals from the inception of the investigation, and that barring extraordinary circumstances, which must be personally approved in writing by specified DOJ personnel, DOJ attorneys will not agree to any settlement or corporate resolution that dismisses charges or provides immunity for individual officers or employees. The basic principles of the Yates Memorandum have been incorporated, with various tweaks, in the DOJ’s current Justice Manual.

On 28 October 2021, Deputy Attorney General Lisa Monaco announced the DOJ’s renewed focus on individual accountability. She declared that the DOJ would restore prior guidance making clear that to be eligible for co-operation credit, companies must provide the DOJ with all non-privileged information about individuals – regardless of position, status, or seniority – involved in or responsible for the misconduct at issue. This announcement ended the approach used by the DOJ since 2018 that allowed companies to limit disclosures to those they assessed to be ‘substantially involved’ in the misconduct.^[20]

37.3.1 Interviews without employee’s counsel

An employer may seek to conduct an interview of an employee, either with or without company counsel present, before that employee has appointed counsel.^[21] Once the employee offers an account of events, it may be difficult to offer a different one later. When counsel for individuals are appointed, they should obtain all information regarding their clients’ prior statements about the subject of the investigation, including requesting any relevant memoranda created in prior interviews. Individual counsel should also request all documents, data and other information pertaining to their clients’ involvement in the subject of the investigation. Requests for such information may be directed to the client, company counsel, law enforcement and other witnesses (or their counsel). Even if counsel is not allowed to participate in a client’s investigatory interview, they should use the acquired information to prepare their clients.^[22]

37.3.2 Separate representation arranged by the employer

Whether the employer agrees to arrange for counsel can depend on a number of factors, such as the employee’s contractual and indemnification rights, state and local laws, the corporate by-laws, and the potential conflict of interest between the employee and the corporation. Although separate representation of an employee can increase expenses and lengthen the investigation, it can also provide certain advantages to the company. It can reduce any suggestion of improper influence by the company over the employee, which can bolster the company’s credibility with the government when reporting the results of the investigation and increase the company’s co-operation credit. In some circumstances (particularly when individual counsel has a good working relationship with company counsel), it can facilitate communication with the employee. Company and individual counsel should come from different law firms. Further, arranging for individual representation can deter the government from communicating directly with the employee.

When confronted with multiple employees who warrant separate counsel, employers may seek to reduce costs by arranging for ‘pool counsel’ to represent the entire group. However, this pool arrangement must be reassessed if a conflict of interest arises within the group.

37.4 The right to privacy

Federal and state law protect employees from unauthorised monitoring of their personal data. An employer seeking to investigate wrongdoing through electronic surveillance must be mindful of these laws.

In most circumstances, an employer can conduct searches of its workplace and computer system to investigate wrongdoing. Such searches are largely unprotected by privacy laws as workspaces, computer systems and company-issued electronic devices are generally considered to be company property. Many companies explicitly address this in written corporate policies and employment agreements. However, unwarranted or unreasonable invasions of privacy during a workplace search may be protected under state law – including state constitutional,^[23] statutory^[24] and common law.^[25]

Employees who use their own personal electronic devices for work should be aware that work-related data stored on those devices belongs to the employer. Therefore, employees are advised to refrain from using their personal devices for work, and instead maintain separate work devices. These concerns arising from the use of personal devices for work have become more salient in the age of covid-19, when many employees are working from home. Therefore, it is all the more important now that employers maintain and update their privacy and bring-your-own-device policies and that these policies be documented, well-defined and require written acknowledgement by employees. If an employer seeks to obtain or review work-related data from an employee’s personal device, the employer must be careful to exclude any personal data.

The federal statute that primarily governs electronic monitoring of employees is the Electronic Communications Privacy Act of 1986 (ECPA). Title I of the ECPA prohibits the interception of oral, wire and electronic communications while in transit. Title II of the ECPA prohibits unauthorised access to stored communications. Both sections impose criminal liability: under Title I, fines up to US$10,000 or five years in prison, or both; under Title II, fines up to US$1,000 or one year in prison, or both. Both sections also provide a private right of action allowing victims to recover actual damages, punitive damages where appropriate, litigation costs and attorneys’ fees.

The ECPA contains two important exceptions. First, it permits interception of a communication or access to a stored communication when one of the parties to the communication has given express or implied consent. Implied consent is inferred from surrounding circumstances indicating that the party knowingly agreed to the surveillance. As the First Circuit explained: ‘The circumstances relevant to an implication of consent will vary from case to case, but the compendium will ordinarily include language or acts which tend to prove (or disprove) that a party knows of, or assents to, encroachments on the routine expectation that conversations are private.’^[26] Implied consent is generally found whenever an employee is notified in advance about the monitoring. However, courts have refused to find implied consent based on knowledge of the mere capability of monitoring.^[27]

The ECPA also permits interception of, or access to, communications by the entity that provides the electronic communications service or system. An employer may therefore monitor and search emails sent on its email system. It may also monitor and record employee telephone calls ‘in the ordinary course of its business’.^[28] Employees should be aware that some employers may choose to install surveillance monitoring systems into work accounts, databases and company-provided devices. As technology and communications systems advance, employees should also be conscious of their activities on new communications platforms. Some messenger services used by companies, such as Slack, have announced privacy policies that allow employers to download all data from their workspace, including all employee data and messages.

An employer seeking to investigate wrongdoing through electronic surveillance must also be aware of state law. Most states (and the District of Columbia) prohibit electronic surveillance of communications unless at least one party to the communication provides consent. Some, but not all, of these jurisdictions provide exemptions for employer monitoring of employee communications. Eleven states – California, Connecticut, Florida, Illinois, Maryland, Massachusetts, Montana, Nevada, New Hampshire, Pennsylvania and Washington – prohibit to some degree, either criminally or civilly, surveillance without the consent of all the parties to the communication.^[29] In addition, some states – most notably Connecticut, Delaware and New York – have enacted laws requiring employers to notify – and, in the case of New York, get express authorisation from – employees before monitoring their electronic communications.^[30]

State common law rules also provide for whether and how employers may monitor employees. Most notably, states that recognise a common law right to privacy may prohibit employers from violating employees’ reasonable expectations of privacy. What expectations of privacy are reasonable generally turns on the facts including the wording of the company’s written monitoring policies, the notice (if any) provided regarding these policies, the nature of the device (personal or company-issued) and the nature of the monitoring.^[31]

In sum, if an employer insists on monitoring its employees’ devices used for work, clear policies and written consent are critical.

37.5 Covid-19

The covid-19 pandemic has impacted virtually every aspect of society, especially the workplace; the virus has presented a variety of new challenges for employers and employees. Most notably, companies have had to adjust to remote working, which, among other consequences, has made it challenging to conduct internal investigations. This may create a temptation to delay investigations until more employees return to the office or a spike in covid cases subsides. However, delaying investigations carries significant risks, such as failing to prevent further employee misconduct, impairing access to time-sensitive evidence and key witnesses, increasing the possibility that allegations will be leaked to the government or the media, and jeopardising potential co-operation credit from the government. If an investigation, in whole or in part, is going to be delayed, investigators should take steps to preserve potentially relevant information, institute appropriate interim compliance procedures and regularly monitor the matter for urgent developments. If investigators proceed with an investigation using remote interviews, they should take steps to prevent witnesses making unilateral recordings^[32] or interviewing in the presence of third parties, and should be mindful that the interviews may be regarded as having occurred in each of the jurisdictions where the participants are located (requiring consideration of each jurisdiction’s laws governing privilege and data privacy). Such measures are important to fulfilling one’s ethical obligation to ‘make reasonable efforts to prevent the inadvertent or unauthorized disclosure of, or unauthorized access to, information relating to the representation of a client’.^[33]

The pandemic has also created new privacy and discrimination concerns. Employers are permitted to take reasonable measures to combat the spread of the virus, including administering covid tests on employees if it is job-related and consistent with business necessity, taking employees’ body temperatures, asking whether they have covid or related symptoms, requiring a note from a qualified medical professional explaining that it is safe for the employee to return to the office after contracting the virus, and requiring those who are ill to stay at home.^[34]Although a number of courts have held that employers may require employees to get vaccinated,^[35] some states have limited by statute or executive order the ability to require proof of vaccination. If an employer is concerned about an employee’s health, it generally may not exclude that employee – or take any other adverse action – solely because the employee has a disability that places him or her at higher risk. Such action is only allowed if the employee’s disability poses a ‘direct threat’ to her health that cannot be eliminated or reduced by reasonable accommodation.^[36] Employers may be compelled to grant reasonable accommodations to employees with disabilities that place them at higher risk from covid-19, provided such accommodations do not create undue hardship for the employer.^[37] Lastly, while the pandemic has forced many businesses to downsize, employers may not use that as a pretext for unlawful discrimination. For example, a company cannot use the pandemic as an excuse to lay off its older workers because of their age.

37.6 Indemnification

Among the significant issues that may arise from in-house counsel, and often external counsel, representing the company and not the individual is whether the employee has a right to be indemnified. The right to be indemnified may extend to legal fees, advancement of legal fees and for any potential judgment debt or settlement. As discussed above, an employee has a right to have his or her own counsel, even if the company pushes for joint representation by company counsel, but the complicated question of whether the company must indemnify the employee for costs around separate representation may arise. Determining a company’s indemnification obligations requires close review of any agreements and understandings that might give rise to indemnification or advancement of fees. It is critical that an employee communicate closely with company counsel to come to a mutual understanding of the company’s obligations.

37.6.1 Determining whether an individual is indemnified

Employees should ask their counsel to assertively engage in communications with the employer and company counsel to determine whether the company will agree to indemnify the individual employee – and if so to what extent – and to advance fees. If the company agrees to, or must, indemnify under any agreement or other source of this right, the employee’s counsel should draft and execute a written agreement binding the company. Although the company may seek to impose unfavourable terms, it is generally advisable to reduce the indemnification obligation to writing.

Employees and their counsel should carefully review potential sources of the right to indemnification. These sources may include company by-laws, local law in the state of incorporation, company policies and insurance policies of the employer.

37.6.2 Potential sources of right to indemnification

37.6.2.1 Corporate by-laws

Corporate by-laws often delineate the company’s obligation to indemnify an employee’s costs arising out of representation for internal investigations or any matters related to his or her official duties. Corporate by-laws require careful review because even if indemnification obligations are provided, they are often listed with limitations or releases from obligation, including limiting obligations to certain employee categories. Limitations and releases include provisions releasing the company from its obligations to repayment of any indemnified cost if the costs subsequently transpire not to be indemnifiable. If these provisions exist, it is likely that the company will require the employee to sign an undertaking letter, in which the employee agrees to repay any amounts advanced if it is later determined that the employee was not entitled to indemnification. Similarly, there is a difference between the duty of an employer to indemnify an employee of costs incurred and any duty to advance defence costs. Corporate by-laws should be reviewed carefully, because absent such language, the employee has no right to advancement of attorneys’ fees.^[38]

37.6.2.2 Local law in state of incorporation

Several states have state and local laws that impose indemnification obligations on companies for private employees. Review of state and local laws is often overlooked because employees assume indemnification provisions are exclusively contained in corporate by-laws and any employment or subsequent agreements with the company.

For example, under Delaware corporate law, directors generally have a right to indemnification if they are, or face being, parties to a proceeding or subject to investigation, unless they did not act in good faith and in a manner reasonably believed to be in, or not opposed to, the best interests of the corporation.^[39] Directors and officers who succeed in their defence are indemnified. On the other end of the permissive spectrum, if a director or officer acts in ‘bad faith’, they are not entitled to indemnification.^[40] Delaware law also allows directors and officers the right to indemnification through advanced costs for pending litigation.^[41] In other states, like Oregon and Washington, state law affords directors this same mandatory indemnification if successful on the merits unless the company’s articles of incorporation provide otherwise.^[42]

California is an example of a state that extends indemnification protections to any private employee, not only directors or officers. Further, the California Labor Code provides that an employee has a right to reimbursement.^[43]

Even if state legislation imposes obligations on companies to indemnify legal costs for private employees, however, the employee might not have the right to select his or her own separate counsel. In other words, unless a known conflict exists, a private employee may be forced to use whichever counsel represents the company. New York is an example of a state where the statutes provide that even if a court ordered an employer to indemnify a private employee, the employee would have to show that the specific attorneys’ fees in question were ‘reasonable’ and ‘necessary’,^[44] which places the burden on the employee to show why representation separate from company counsel is necessary. This places employees in a difficult position if they have reason to believe that their interests would be better served with separate counsel but would have to forgo having certain legal costs covered by their employer. Employees that believe they will be indemnified pursuant to state law should adequately review the statute to ensure that they understand the parameters – and potential limitations – of indemnification obligations at the onset of an investigation.

37.6.2.3 Company policies

Employees should also look at company policies and employment contracts or subsequent agreements as sources of indemnification rights. Individual employees may have contractual indemnification rights in their employment agreements. Even if the company by-laws do not indicate a right to indemnification, a company must honour any obligations in individual employment agreements such as including within the scope of indemnification certain employee categories not otherwise covered by by-laws or state and local laws. As a strategic point, employers may expand the scope of indemnity to ensure co-operation of employees, which may show the company in a more favourable light to any regulator or investigative body.

37.6.2.4 Insurance policies of employer

Some employers may choose to purchase directors’ and officers’ (D&O) insurance to supplement or provide an alternative to indemnification. If the employer has D&O insurance, the nature of the allegation and the terms of the specific policy may trigger payment of defence costs.

D&O insurance is increasingly important in corporate culture owing to the increase in shareholder, class action, derivative action and other prosecutorial and regulatory investigations targeting not only companies, but also their directors and officers. Directors and officers of companies should carefully review terms, conditions, provisions and exclusions of any D&O policy.^[45]

37.6.3 Advocating for indemnification

Companies are not always eager to indemnify employees for representation or costs incurred during an investigation or defence. However, employees should review possible sources of company obligation and advocate for companies to indemnify them for incurred costs or advancement of fees, including before entering any employment or separation agreement.

The employer or company may become more credible and promote efficiency and effectiveness of an internal investigation by ensuring that employees are adequately represented. If company counsel recognises a conflict of interest and the need for the employee to have separate representation, the corporation benefits if the employee is co-operative. Therefore, the company may assess the employee’s involvement and whether failure to pay individual counsel fees or to advance attorneys’ fees will make the employee’s co-operation less likely. While in some instances employees may be required to co-operate by subpoena, it is in the best interest of the corporation to work jointly with the employee to prepare its own defence and receive information in advance through a joint defence agreement.

In addition, regulators and prosecutors cannot take into account during an investigation whether a corporation is advancing or reimbursing attorneys’ fees or providing counsel. Along the same lines, a prosecutor or regulatory body cannot request that a company refrain from taking such action. In 2008, the Department of Justice published the Filip Memorandum,^[46] which laid out the principles of federal prosecution of business organisations. The guidelines, codified in the US Attorney’s Manual (now called the Justice Manual), state that: ‘In evaluating cooperation, however, prosecutors should not take into account whether a corporation is advancing or reimbursing attorneys’ fees or providing counsel to employees, officers, or directors under investigation or indictment.’^[47]

37.7 Situations where indemnification may cease

Employees should be aware of the circumstances in which a company’s obligations to indemnify may cease. As mentioned, a company’s obligations to indemnify an employee may be contingent on, and circumvented by, any undertaking agreement between the parties. Further, a company is generally released from its indemnification obligations for any violation of an undertaking agreement (substantive or procedural) and fraud or bad faith.

In some instances, an employee’s failure to co-operate with a company’s investigation could absolve the company’s obligation to cover individual costs. This can create a difficult decision for an individual employee regarding whether to co-operate where failure to do so will affect indemnification. Even if an employee does not want to co-operate with company counsel – internal or external – and submit to an interview or otherwise co-operate, he or she may still be called to produce testimony or information pursuant to a subpoena.

37.8 Privilege concerns for employees

Privilege considerations become central during investigations. Because of the various permutations of attorney–client relationships with both internal and external counsel, it is important for employees to remember that they only enjoy protections over communications with individual counsel. If an employer requests an interview with an employee, employee counsel and company counsel, the communications and testimony at the interview are not privileged.

An employee and his or her counsel should note whether the company counsel issued a proper Upjohn warning and whether it was documented. If an inadequate Upjohn warning was given, an employee’s individual counsel may attempt to prevent or limit disclosure of any statements made by the employee in an interview where individual counsel was not present.

The Third Circuit established the Bevill standard to determine whether a company employee holds a joint privilege with the employer company over communications with corporate counsel, which has since been adopted by the First, Second, Ninth and Tenth Circuits. The Bevill standard holds that ‘any privilege that exists as to a corporate officer’s role and functions within a corporation belongs to the corporation, not the officer’.^[48] The Court in Bevill extended the privilege to officers and employees in an individual, personal capacity only when the employee satisfies the following five-factor test. First, they must show that they approached counsel for the purpose of seeking legal advice. Second, they must show that when they approached counsel, they made it clear that they were seeking legal advice in their individual capacity rather than in their representative capacities. Third, they must demonstrate that the counsel saw fit to communicate with them in their individual capacities, knowing that a possible conflict could arise. Fourth, they must prove that their conversations with counsel were confidential. And fifth, they must show that the substance of their conversations with counsel did not concern matters within the company or the general affairs of the company.^[49] Notwithstanding the foregoing, an employee would be ill-advised to confide in, or speak candidly with, company counsel given the subjective nature of the standard and make efforts to secure personal individual counsel.

Finally, as a practical matter, employees should be aware that communications with other employees or colleagues regarding the investigation are not privileged regardless of whether the colleague is also involved in the investigation or represented by the same counsel. Even if an employee believes he or she is sharing attorney communications with other employees who need to know the attorney’s advice and who also have an attorney–client privilege with the same counsel because he or she is involved or implicated in the investigation and also represented by company counsel, it is always prudent to refrain from sharing privileged information. In addition, employees should attempt to communicate with individual counsel on personal and non-company devices to ensure that the privilege is protected.

Footnotes