Can You Fire an Employee who Refuses to Participate in an Internal Investigation? The 2nd Circuit Says Yes.

When an employee is accused of misconduct, particularly when those allegations are criminal in nature, conducting an internal investigation is a best practice. But what is an organization to do when the alleged offender refuses to show up for an interview? May it go so far as to fire the employee, even if that means the employee loses out on benefits or other compensation? A recent case from the Second Circuit Court of Appeals says it can.

The case, Gilman v. Marsh & McLennan Cos., involved a company that was facing some serious trouble. The New York state attorney general had opened an investigation into some unsavory business practices involving the company. At that point, the company retained outside counsel to conduct an internal investigation into the AG’s allegations. Several months later, the AG’s investigation became more serious, and ultimately, the AG filed a civil complaint against the company for alleged fraudulent business practices and antitrust violations.

In light of these serious allegations, the company expanded its internal investigation and suspended two employees who had been identified during the AG’s investigation as co-conspirators in the illegal activity. Given that the stakes had been raised, the company’s counsel asked the two employees to sit for interviews and explained that if they refused, they would be fired. One employee simply refused; the company fired him the next day. The other employee submitted paperwork attempting to retire and also refused to be interviewed. The company refused to accept the resignation/retirement, and fired that employee as well.

Both the employees in question happened to be eligible for what the court deemed “valuable employment benefits.” These included stock options, stock bonus units, deferred stock units, and severance plans, all of which were only available as long as the employees were not terminated for cause. The company took the position that the employees had been terminated for cause and denied them these benefits. The employees brought a claim against the company, claiming entitlement to these benefits.

The appellate court ultimately ruled that the company was well within its right to fire the employees for cause, and thus, owed them nothing. Central to the court’s decision was that the request to sit for an interview as part of the internal investigation was reasonable. The court noted that the employees could have been fired simply because of the (very serious) allegations of criminal conduct. And here, the company was facing pretty serious liability for its employees’ alleged criminal acts—demanding that the employees answer questions about that alleged misconduct was well within the company’s right. The court also noted that an employee can’t avoid termination for violating a reasonable order of an employer by trying to quit or retire. To allow such a practice, the court explained, would allow employees to preempt and avoid termination for cause altogether (as long as they acted fast enough).

The Gillman case presents a scenario that may crop up again, as companies feel more pressure to conduct thorough and complete internal investigations. In the corporate setting, companies want to take advantage of leniency promised by regulatory agencies when they cooperate in the face of civil and criminal charges. In September 2015, Sally Quillian Yates, U.S. Deputy Attorney General, issued a memo on “Individual Accountability for Corporate Wrongdoing.” Known as the “Yates Memo,” this memo outlined several policy shifts and priority changes for the Department of Justice when investigating and prosecuting corporate fraud cases. One of the key provisions of the Yates memo is an emphasis on corporate cooperation with the DOJ when wrongdoing is alleged—leading to more emphasis on internal investigations and information gathering. Religious organizations or nonprofits are more likely to do internal investigations on issues like child safety.

Though the Yates memo is unlikely to directly affect most internal investigations in religious or nonprofit organizations because of the memo’s limited reach, its application is clearly shaping federal case law that courts will continue to look to in a variety of cases. Attorneys at Telios Law are monitoring how the Yates memo is shaping case law, and how those changes might affect both secular and religious organizations in the future.

Though the Gillman case relied on interpretation of state law to decide what constituted “for cause termination,” its firm position that companies can fire employees who refuse to participate in internal investigations gives employers more flexibility and power to conduct these investigations. Better yet, organizations may consider explicitly informing employees when they are hired that failure to participate in an internal investigation may be grounds for termination. Such a notice could be added to an existing employee handbook or policy manual and would strengthen the employer’s position.