A federal appellate court has recently confirmed that, in the appropriate circumstances, an employer has "cause" to terminate an employee who refuses to cooperate with outside counsel during an internal investigation.

In Gilman et al. v. Marsh & McLennan Co. Inc. et al., Docket No. 15-0603 (June 16, 2015), the Second Circuit Court of Appeals ruled that Marsh & McLennan had cause to terminate two employees for their refusal to sit for interviews by Marsh’s outside counsel retained to investigate suspected criminal conduct. The Gilman decision is likely to impact employment lawyers counseling clients on how to handle uncooperative employees. The decision also serves as a reminder that, in addition to the Upjohn warning, lawyers conducting internal investigations should consider when and whether to add a warning about the potential adverse employment impact a decision not to cooperate may have on the employee.

The facts in Gilman

The underlying facts in the Gilman case began in April 2004, when the New York Attorney General commenced an investigation of a "contingent commission" scheme where insurance brokers allegedly steered clients to particular insurance carriers. As a result of the Attorney General probe, Marsh engaged outside counsel to conduct an internal investigation. As part of that investigation, the outside lawyers interviewed several employees, including William Gilman and Edward McNenney.

Shortly after those interviews, the Attorney General’s investigation shifted to an alleged bid-rigging scheme and Gilman and McNenney were identified as alleged co-conspirators. As a result, Marsh suspended them with pay. Marsh’s outside counsel then asked Gilman and McNenney to sit for interviews, with a warning that failure to cooperate would result in termination. After Gilman and McNenney both refused, Marsh promptly fired each of them.

The ensuing lawsuit

Following their termination, Gilman and McNenney sued Marsh seeking recovery of valuable employment benefits. Accordingly, the issue in the case revolved around whether Gilman and McNenney were terminated "for cause" and, as a result, forfeited those benefits. In affirming the lower court’s grant of summary judgment in favor of Marsh, the Second Circuit held that "the interview demands were reasonable as a matter of law because at the time they were made, Gilman and McNenney were Marsh employees who had been implicated in an alleged criminal conspiracy for acts that were within the scope of employment and that imperiled the company."

The Gilman case was governed by Delaware law, which states that "cause" for termination includes the refusal to "obey a direct, unequivocal, reasonable order of the employer." The court held that as soon as the employer became aware of the possibility that two of its employees might be prosecuted criminally, Marsh had sufficient basis to act on those allegations by seeking to interview them. As a result, the court ruled that the employer would have had cause to terminate those employees for refusing that interview request, regardless of the ultimate resolution of the allegations. The court held: "When an employer, because of an employee’s wrongful conduct, can no longer place the necessary faith and trust in an employee, [the employer] is entitled to dismiss such employee without penalty."

Duty to investigate

Importantly, the court noted that an employer is presumptively entitled to seek information from its employees about suspicions of on-the-job criminal conduct. In fact, the court stated that Marsh had a duty to its shareholders to investigate any potentially criminal conduct by its employees that could harm the company. The court acknowledged that the employees were placed "in a tough position of choosing between employment and incrimination (assuming of course the truth of the allegations)." Indeed, the employees were free to refuse to submit to the interviews.

But that did not immunize them from collateral consequences that could flow from that decision—including leaving their employer with no practical option other than to fire them. Given the circumstances, the Gilman court concluded that Marsh’s demand of its employees to explain themselves in an interview under the penalty of termination was "unassailable, even routine."

Internal investigation was not state action

The plaintiffs also argued that, in light of Marsh’s cooperation with the New York Attorney General’s office, Marsh’s request that its employees answer potentially incriminating questions amounted to "state action." The court soundly rejected that argument, characterizing it as "the legal equivalent of the ‘Hail Mary pass’ in football." There was no evidence, the court noted, that the New York Attorney General "forced" Marsh to demand interviews, "intervened" in decision making, "steered" the interview request, or "supervised" the request.

Marsh had a reasonable, independent reason for conducting the internal investigation beyond cooperating with the government. Any rule that deemed a cooperating company to be a government actor, the court reasoned, "would be incompatible with corporate governance and modern regulation."

Conclusion

The success of an internal investigation often depends on the cooperation of a company’s employees. Certainly the threat of termination—or a warning about that potential consequence—will not be the appropriate strategy in every case. The recent Gilman decision, however, confirms that in many circumstances an employee’s refusal to cooperate with an internal investigation can be "cause" for termination.