Employee’s Failure to Cooperate With Internal Investigation — in the Face of Potential Criminal Charges — Constitutes Cause for Termination

When government investigators come knocking, employers expect that their employees will cooperate with any ensuing internal investigation. But an employee whose conduct is in question may not want to participate in that investigation — where the Fifth Amendment right against self-incrimination does not apply — for fear that evidence developed during the investigation may be provided to the government. This summer, the Second Circuit Court of Appeals turned up the heat on individual employees by ruling that a refusal to cooperate in an internal investigation justified a “for cause” termination of their employment.

In Gilman, defendant Marsh & McLennan Cos. (“Marsh”) faced a criminal investigation by the New York Attorney General stemming from an alleged bid-rigging scheme between Marsh and American International Group. Marsh executives William Gilman (“Gilman”) and Edward McNenney (“McNenney”) were identified as co-conspirators. Marsh quickly commenced an internal investigation and asked Gilman and McNenney to appear for interviews with its outside counsel regarding their alleged conduct. Gilman and McNenney refused to cooperate, and Marsh promptly terminated each “for cause.” Because their discharge was for cause, the pair forfeited their entitlement to valuable unvested stock options and severance pay under the company’s Stock Award and Severance Pay Plans.

Gilman and McNenney sued Marsh for violations of ERISA, breach of contract, and breach of the implied covenant of good faith and fair dealing, challenging the “for cause” characterization of their discharges in an attempt to regain the lost employment benefits. Applying Delaware law, the Second Circuit emphatically rejected their claims:

Given the circumstances, Marsh’s demand that Gilman and McNenney explain themselves in an interview under the penalty of termination was unassailable, even routine. It did what any other company would do, and (arguably) what any company should do. Marsh’s interview demands were reasonable and it had cause to fire Gilman and McNenney for refusing to comply.

The court similarly rejected the executives’ objections that the interview demands put them between a rock and a hard place:

Marsh’s demands placed Gilman and McNenney in the tough position of choosing between employment and incrimination (assuming of course the truth of the allegations). But though Gilman and McNenney “may have possessed the personal rights to [not sit for interviews], that does not immunize [them] from all collateral consequences that come from [those] act[s],” including leaving Marsh “with no practical option other than to remove [them].”

Gilman provides powerful leverage to employers, which often face resistance from employees asked to cooperate in internal investigations. And this precedent presumably would apply with respect to any type of internal investigation, whether related to potential criminal activity or to claims of discrimination, harassment, or whistleblowing. For an employee who is the subject of an investigation, however, Gilman enhances risk and narrows the range of options.