As part of your investigation into possible inventory fraud you want to put a suspect under surveillance (as defined in the Fraud Examiner’s Ma

What Every Fraud Examiner Needs to Know

January/February 2001

By Kevin P. Prendergast, J.D.

The phrase "getting off on a technicality" is well-known in the criminal law arena. If a law enforcement officer is found to have violated the rights of a suspect during a search or arrest, the suspect could walk free, regardless of his guilt or culpability. That same concept applies in the employment law setting as well. 

For example, I was recently involved in a case involving an employee in a highly safety-sensitive position who was terminated for failing an alcohol screening. At the arbitration, the employee freely admitted to having consumed a 12-pack of beer prior to reporting to work. The employee was involved in an altercation on the job and was ordered to immediately go for the screening, which he couldn’t pass.

However, the employee, as a union member and a public employee, was protected by union contract, civil service rules, statutes, and the U.S. Constitution. His supervisors, when ordering the alcohol screen, had failed to follow the technical rules governing screening. This employee prevailed on the technicality, triumphantly returning to work with a year’s worth of back pay. Both supervisors were later disciplined by the employer who was quite irritated at having to sign a check for the back pay. 

If you’re asked to investigate employee misconduct, you’ll need to know the laws that limit or even prohibit certain types of investigations. If you don’t, you could become embroiled in some nasty courtroom battles. 

Ten years ago, the debate was whether an employee’s locker or desk could be searched. Today, the arguments are over the sanctity of hard drives, e-mail messages, and voice mail. 

Employment litigation can have a tremendous effect on a company’s bottom line. Even when a firm prevails in court, the cost of managers tied up in depositions and trial preparation can be substantial. Avoid landing in court by knowing the laws and the latest interpretations. 

As an initial matter – prior to commencing an investigation – you need to know what type of employment relationship exists between the employer and employee. This step will often set the ground rules to which you will need to adhere. Once you begin the investigation, you need to be aware of the applicable laws so that you can at least spot potential issues and avoid problems. You don’t need to be an expert but you do need to know all written procedures to avoid the "technicality trap."

Define Employment Relationship

All employment relationships aren’t created equal. The nature of the relationship will set limitations on the type of investigation to be performed. Investigations may be limited by written agreements, union contracts, civil service rules, or constitutional limitations applicable to public employees. 

Define Term Employment 

Employees may be hired for a definite period of time. During that time, they may only be terminated for "just cause." At the end of the employment period, the relationship may be terminated by either party for any reason. 

Employment for a definite term is often created by a written contract, which spells out the length of employment. Some contracts may also use language indicating the employment will continue "during good behavior," or under similar circumstances. Other contracts provide that employment will continue until the occurrence of certain events, such as misconduct or other undesirable conduct. All of these clauses create an employment relationship, which can only be terminated for just cause, at the expiration of the stated period, or upon the occurrence of one of the listed contingencies.

In the absence of written employment contracts, courts have looked to other items to find the existence of an implied agreement for a definite term. Examples include:

· statements in an employee handbook;

· oral statements made by a supervisor during the hiring process;

· oral statements made by a supervisor during a review or meeting with the employee; and

· the course of dealing between the employer and employees, such as past, unwritten practices, which have been consistently followed.

You should perform a thorough investigation to determine whether any documents exist or whether any statements were made which would create an employment relationship for a definite term. Such an approach will alter the approach taken in investigating and disciplining the employee. 

Public Employees

The U.S. Supreme Court has held that most public employees have a constitutionally protected property interest in their jobs. These employees cannot be deprived of their jobs without strict adherence to due process. At a minimum, due process requires 1) a hearing before the disciplinary action which must include notice of the charges, 2) a description of the evidence supporting the charges, 3) an opportunity for the employee to explain his side of the story, and 4) a post-disciplinary hearing before a neutral party who will decide the propriety of the discipline. The employee has the right to call witnesses, cross-examine adverse witnesses, and be represented by counsel at this hearing.

Union Employees

Many union contracts contain provisions, which prohibit discipline without just cause. Those agreements often contain layered grievance procedures that provide for one or more hearings and culminate in arbitration before a neutral party. They also provide for union representation at every disciplinary meeting. Failure to allow representation will often result in the disciplinary action being overturned by an arbitrator.

The rights of employees to union representation during investigatory meetings are generally known as Weingarten rights. (See the sidebar, "New Rules Regarding Representation During Interviews.") In NLRB v. Weingarten (1975), 420 U.S. 251, the U. S. Supreme Court ruled that an employee has a right to union representation during an interview if

the employee requests union representation, and the employee believes that the interview will lead to discipline. Once the request is made and denied, the employer may continue with the investigation without interviewing the employee.

At-will Employees

Most states recognize that an employment relationship without any agreement as to the length of service will generally be deemed employment "at-will." An at-will employee may resign or be terminated at any time, with or without cause. The employer may terminate an at-will employee without providing the employee with a reason.

Jurisdictions which recognize the at-will employment relationship also recognize a public policy exception to the general rule. Under this exception, an employer may not take disciplinary action against an employee if the action would violate a clear public policy. Examples include terminations for serving on jury duty and whistle-blowing.

Fair Credit Reporting Act

The Fair Credit Reporting Act (FCRA) imposes a number of requirements upon employers who use "consumer reports" for "employment purposes." A common misconception relates to the definition of the term "consumer report." While the term encompasses the traditional credit reports issued by the major credit reporting agencies, the FCRA also applies to other reports such as driving records, employment records, and criminal records.

Definition of "Consumer Report" Under the FCRA

The term "consumer report" means any written, oral, or other communication of any information by a consumer reporting agency bearing on a consumer’s credit worthiness, credit standing, character, general reputation, personal characteristics, or mode of living which is used or expected to be used or collected in whole or in part for the purpose of serving as a factor in establishing the consumer’s eligibility for employment purposes .

As this definition makes clear, almost any information that an employer receives from a consumer reporting agency – even if it does not relate to credit history – triggers the application of the FCRA. The act also broadly defines the term consumer reporting agency to include employment screening companies, investigative firms, and even a law firm that was providing background information to its clients.

The Federal Trade Commission (FTC) has primary responsibility for enforcing the FCRA. The FTC issues staff opinion letters interpreting certain sections of the FCRA. In one opinion, the FTC staff stated:

"The terms ‘character, general reputation, personal characteristics, or mode of living’ cover a great deal of non-credit information. For example, driving records, employment records and criminal records all involve these characteristics, although these types of information do not necessarily reflect upon credit-worthiness, credit standing or credit capacity. Those in the business community who believe that the FCRA is limited to credit are misreading the law." 

Investigative Consumer Report

An "investigative consumer report" is a special type of "consumer report" which is based upon personal interviews with neighbors, friends, employers, and/or other persons familiar with the employee. An investigative report is subject to additional regulation under the FCRA. 

Definition of "Employment Purposes" Under the FCRA

The term "employment purposes" when used in connection with a consumer report means a report used for the purpose of evaluating a consumer for employment, promotion, reassignment, or retention as an employee.

The 1996 amendments to the FCRA added the term retention to the definition.

The FTC staff subscribes to the view that the term "employment purposes" should be liberally construed to effectuate the remedial purpose of the FCRA. The term is not limited to the traditional employer-employee relationship and includes independent contractor relationships, security clearances for employees of government contractors, and manufacturer’s representatives. The FCRA is a remedial statute, which means that it’s designed to provide a remedy for persons who have been "wronged." Remedial laws are often interpreted by courts broadly to give full protection to the class of people they cover. The FTC is saying that they will broadly interpret definitions under the FCRA to effectuate (carry out) the remedial purpose that law. 

Requirements for Obtaining and Using Consumer Reports

The Disclosure

Prior to obtaining a consumer report for employment purposes, an employer must make a clear and conspicuous disclosure (in a document consisting solely of the disclosure) that a consumer report may be obtained for employment purposes. Many employers place the disclosure on the employment application. The FTC has taken the position that this is improper since the disclosure must be contained in a document unencumbered by other information.

If the employer intends to obtain an investigative consumer report, the employer must disclose to the consumer that an such a report, including information on his character, general reputation, personal characteristics and mode of living, whichever are applicable, may be obtained.

The Authorization 

Prior to obtaining a consumer report for employment purposes, the consumer must give written authorization for the procurement of the consumer report by that person. The FTC staff has opined that the disclosure and authorization may now be combined if there is no other information contained in the document.

An employer may also provide a blanket disclosure and obtain a continuing authorization, which would allow the employer to obtain reports on employees throughout their tenure with the employer. The blanket disclosure should advise the employee that the disclosure and authorization are continuing in nature.  

The Pre-adverse Action Letter

Prior to taking any adverse action based in whole or in part on a consumer report, the person intending to take such adverse action shall provide to the consumer: a) a copy of the report, and b) a description of the consumer’s rights under the FCRA. The entire report must be provided to the employee at this stage. The employer must then wait a reasonable time for the employee to respond. (The amount of time will vary in each case.)

The Adverse Action Letter

After taking any adverse action based in whole or in part on a consumer report, the employer must give notice to the consumer of:

· the adverse action taken;

· the name, address, and phone number of the consumer reporting agency that supplied the report;

· a statement that the consumer reporting agency which supplied the report did not make the decision to take the adverse action and cannot give specific reasons for it; and

· a notice of the individual’s right to dispute the accuracy or completeness of any information contained in the consumer report and the consumer’s right to obtain a free copy of the report from the consumer reporting agency upon request within 60 days.

The FCRA and Existing Employees

As previously noted, in the 1996 amendments, Congress added the word "retention" to the definition of the term "employment purposes" in the FCRA. Shortly thereafter, the FTC took the position that the FCRA applied to investigations into the conduct of existing employees since these investigations often led to employment terminations and other disciplinary action. 

In one opinion, the FTC opined that an investigation of an employee theft matter was performed for employment purposes under the act. In a second opinion, the FTC stated that a sexual harassment investigation performed by the employer’s outside legal counsel was covered as well. 

These interpretations angered employer groups who argued that the compliance requirements contained in the act would severely compromise investigations into employee wrongdoing. Employers claimed that if the FCRA’s requirements of disclosure and authorization applied to employee investigations, they would be forced to advise the target of the investigation that an inquiry was being performed and get his or her consent to perform the investigation. Nonetheless, the FTC stood by the opinions.

Employer groups proceeded to Capital Hill to seek a legislative remedy. In early 2000, House Resolution 3408 was introduced in Congress to exempt from the FCRA investigations into employee misconduct. As of this writing, HR 3408 is still in committee and hasn’t yet been enacted.

The Right to Privacy

The Fourth Amendment of the U.S. Constitution provides that "[t]he right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated." Generally, the right to privacy has been interpreted to control primarily government action against individuals, including public employers and their employees.

Nonetheless, many state constitutions also recognize an individual’s right to privacy and apply that right to both public and private persons and entities. Additionally, rapid modern growth of statutory and common law privacy torts and statutory recognition of privacy rights in electronic and mail communications have given Americans privacy protection in contexts in which government action is usually absent. 

The central issue in privacy litigation is whether the employee had a legitimate expectation of privacy in the area that was subject to investigation. While employee break rooms and common areas may create a slight expectation of privacy, bathrooms, locker rooms, and desks may be treated differently. The expectation of privacy must be both subjective and reasonable.

Many employers make clear in handbooks or written employment policies that desks, lockers, computers, work areas, etc. are owned and controlled by the employer and the employer has the right to inspect and monitor their use at any time. These policies are generally upheld, especially in employment-at-will states. If the employee does not like the level of privacy protection, he or she is free to move on.

Searches and Surveillance 

Lockers and Desks

Privacy rights must be considered whenever employees’ desks or work areas are searched or placed under surveillance. In an invasion of privacy claim arising from a workplace investigation, as in a Fourth Amendment claim, an employee will allege that the employer violated his legitimate expectation of privacy. The question of whether such an expectation should exist is generally an issue of fact.

Whether a reasonable expectation of privacy will be deemed to exist often hinges on the circumstances of each case. In K-Mart v. Trotti, 677 S.W.2d 632 (Tex. Ct. App. 1984) a reasonable expectation of privacy was found in an employee locker which the employee had locked at her own expense and with the employer’s consent. The court reasoned that the employer might have legitimately searched the locker had the lock been that of the employer, but held that "[w]here … the employee purchases and uses its own lock on the lockers, with the employer’s knowledge, the fact finder is justified in concluding that the employee manifested, and the employer recognized, an expectation that the locker and its contents would be free from intrusion and interference."

On the other hand, employees’ expectation of privacy can be waived. For instance, the Sixth Circuit found no invasion of privacy in locker searches where the employees had signed waivers acknowledging that their lockers were subject to random inspection at any time and where their collective bargaining agreement allowed random searches. American Postal Workers Union v. U.S. Postal Service, 871 F.2d 556 (6th Cir. 1989). In another case, an employee gave a key to his credenza to his secretary; the Seventh Circuit Court found that this amounted to consent for the employer to search the credenza. By giving his key to another, the employee had waived his expectation of privacy. O’Donnell v. CBS, Inc., 782 F.2d 1414 (7th Cir. 1986).

Employers should have a written and posted policy that desks and lockers are company property and are subject to inspection at all times. The policy should state that employees shouldn’t expect these areas to be private, even if locked or secured by the employee.

Body Searches

Searches of the person should only be conducted when the employer has probable cause to believe that the employee has engaged in wrongdoing. The reasons for the search should be put in writing prior to the search and presented to the employee. The employee should be questioned about his suspicious activity prior to the search to rule out any potential mistaken assumptions. 

The search should be conducted in as private a setting as possible by a management employee with a witness present. Otherwise, it is one person’s word against another as to what happened during the search or meeting. A witness helps to break that tie. Avoid over-publicizing the investigation and limit information to those with a need-to-know. Employees may claim that their privacy has been violated through the communication of private information to persons not involved in the investigation or disciplinary process. It also may turn out that the employee has done nothing wrong. In these cases, an employee may claim damage to his or her reputation by an over-publicized investigation. The results of the search should be documented. Employees should be advised in handbooks and other written policies of the possibility of being searched and the circumstances under which a search may be conducted. The policy should also state that the refusal to submit to a search will be considered punishable insubordination.

In Koepplin v. Zortman Mining, Inc., 881 P. 2d 1306 (Mont. 1994), the court found no invasion of privacy where the employer, fearing violence when it terminated an employee, requested a sheriff’s deputy to be present. The deputy frisked the employee at the beginning of the meeting. The court found no employer action existed since it was the deputy, not the employer, who conducted the search.

Video and Audio Surveillance

Video surveillance may only be conducted by employers in areas where employees have no reasonable expectation of privacy. Surveillance in bathroom stalls, locker rooms, dressing rooms and other private areas will likely constitute an invasion of employees’ privacy. Audio surveillance is covered by Title I of the Electronic Communications Privacy Act of 1986 (ECPA). This statute prohibits all interceptions of wire, oral, or electronic communications except in limited circumstances. In general, employers may only conduct audio surveillance if employees have consented to the monitoring, or if the monitoring is done in the ordinary course of business (for instance, monitoring customer service phone calls for purposes of quality control). 

In one case, two workers at a county office sued their employer for secretly taping their conversation in a storage area. The employer later played the tape for his wife and used information from the tape to terminate one of the workers. The employees sued under the ECPA and won $110,000 between them. Dorris v. Absher, 959 F.Supp. 813 (M.D. Tenn 1997) 

In Vega-Rodriguez v. Puerto Rico Telephone Co., 110 F.3d 174 (1st. Cir. 1997) the court ruled that employees don’t have an expectation of privacy in a common work area which is shared with other workers. The court held that electronic surveillance of these areas doesn’t constitute an invasion of privacy.

Employee Mail

An employer isn’t permitted to search an employee’s mail before it’s been delivered. Federal law prohibits any person who may have plans to obstruct correspondence from taking a letter, postcard, or package from the mail before it has been delivered (18 USC 1702) [Vernars v. Young, 539 F.2d 966 (3rdCir. 1976)].

Other Searches

An employer may not search an employee’s property located off the employer’s property [Love v. Southern Bell Telephone, 263 So. 2d 460 (La. App. 1972)]. However, where an employee’s vehicle is parked in the employer’s parking lot, the employer may reasonably search the vehicle [Gretencord v. Ford Motor Co., 583 F. Supp. 331 (D. Kan 1982)].

Electronic Communications

The emergence of e-mail, voice mail, and Internet communications in the workplace have set off a legal debate which is far from being resolved. Federal laws and many state laws prohibit the interception of employee telephone conversations without the consent of one of the parties to the communication. Generally, the consent must be written. Civil and criminal penalties are possible in which employee telephone conversations are improperly recorded. 

Telephone Conversations

The Electronic Communications Privacy Act of 1986 generally prohibits the interception of any wire, oral, or electronic communication. This statute also prohibits the disclosure of information learned through such methods.

An employer is allowed to intercept electronic communications of employees if the interceptions are made in the ordinary course of business and if the employer has provided written notification to employees that it regularly monitors calls for training purposes [James v. Newspaper Agency Corp., 591 F.2d 579 (10th Cir. 1979)]. However, an employer must be able to state a legitimate business purpose, and there must be minimal intrusions into employee privacy. 

In one case, an employer began recording the conversations of two workers who were overheard making inflammatory remarks about supervisors of the company. The court found that the company had a legitimate reason to record these conversations since the potential "contamination" of the working environment was of utmost importance and the conversation was not personal in nature [Epps v. St. Mary’s Hospital of Athens, 802 F.2d 412 (11th Cir. 1986)].

Employer monitoring of all conversations on employee phone lines won’t pass muster under the ordinary course of business exception, and employers must not monitor calls that are evidently personal in nature. For example, courts will allow the monitoring of calls by an employer to determine the nature of the calls (personal or unauthorized) but not to monitor the content of the calls [Watkins v. L.M. Berry & Co., 704 F.2d 577 (11th Cir. 1983)]. In another case, when an employer monitored more than 22 hours of an employee’s calls (including private conversations), one court found the company had violated the ECPA [Deal v. Spears, 980 F.2d 1153 (8th Cir. 1992)].

As is true in other areas, the key is for an employer to have a written policy advising employees that calls may be monitored and to refrain from making personal calls on company time. 

E-mail and Voice Mail

E-mail, voice mail, and e-mail messages present a separate problem. Many voice mail systems store messages automatically and e-mail messages are often stored on back-up tapes, even after they have been deleted. Employees may believe that these messages are private especially when they are given personal passwords to enter the system.

Courts that have considered whether employees have an expectation of privacy in voice mail and e-mail have focused on whether an employer had a written policy on the subject. Courts have asked whether the policy informed employees that electronic communications were stored and could be accessed by supervisors, and whether employees acknowledged in writing that they received the policy. Under these circumstances, courts have found that employees possess no reasonable expectation of privacy.

In United States v. Maxwell, 42 M.J. 568 (C.A.A.F. 1995), the court found that a public employee had a reasonable expectation of privacy in e-mail communications since the e-mail was protected by an individually assigned password. However, in Bourke v. Nissan Motor Corp., No. B068705 (Cal. Ct. App. July 26, 1993), the court found no expectation of privacy in password protected e-mail messages. The court relied on the fact that the employees had signed a company policy that restricted e-mail usage to business purposes.

The ECPA makes it a crime to intercept or record electronic communications without the consent of at least one party to the communication. However, several exceptions to the ECPA allow an employer to review e-mail messages provided it is done for a legitimate business purpose. Because of the recent emergence of e-mail as a mass communication medium, there are few authoritative court cases on the issue or workplace monitoring of e-mail. Those courts that have examined the issue have focused on the privacy issues and whether the employee had a legitimate expectation of privacy.

For example, Smyth v. Pillsbury Company, 914 F. Supp. 97 (E.D. Penn. 1996), the plaintiff was terminated for sending e-mail messages to a co-worker that were critical and disrespectful towards management. The employer had a policy stating that e-mail correspondence wouldn’t be intercepted and used against an employee as grounds for termination or reprimand. Despite this policy, the court found that the employer had a compelling interest in preventing unprofessional or inappropriate use of the e-mail system and that interest outweighed the employee’s privacy interests. 

Employee Records and Files

Access to Personnel Files

State laws differ regarding whether an employee has a right to examine his personnel files. For public employees, the majority of the non-medical information in their files are deemed public records and can be obtained through a Freedom of Information Act request or a request made under the public records act of the state in which the employee works.

For employees in the private sector, only 20 states have enacted legislation mandating employee access to their personnel records. Typically, where access is required, employees may only review performance evaluations, disciplinary records, compensation records, and employee benefit documents but no investigatory records.

Medical Records

The Americans With Disabilities Act requires that medical information obtained by an employer regarding the medical history or condition of an employee be treated as confidential and stored in a separate medical file apart from other personnel records.

Access to medical records should be made only on a need-to-know basis and employers should refrain from turning medical files over to an investigator unless the medical condition is germane to the inquiry.

In some states, even those that don’t require access to personnel files, an employer must disclose medical records if an employee asks for them. Consult the law of your jurisdiction.

Litigation and Discovery

Personnel files make good reading for plaintiffs’ lawyers who are looking for a smoking gun. Even if your state doesn’t mandate disclosure of personnel files, you can’t assume that those records will remain confidential. In a lawsuit, the employee is entitled to request information, including personnel files, meeting notes, and investigatory files, as long as the information is relevant to the case. Relevancy is interpreted broadly in discovery issues. Every document placed in an employee’s file or drafted as part of an investigation should be prepared as if a jury will be proofreading it. 

Arguably, technology may streamline the marketplace but it complicates the legal issues surrounding employment investigations. Know all the potential pitfalls before entering any employee investigatory interviews; it could keep you and your company out of court.

Kevi