LABOR & EMPLOYMENT NEWSLETTER - One Bad Apple Can Ruin a Company

Expect the unexpected. In business, as in life, we all too often learn that lesson the hard way. Changing market conditions, natural disasters or major accidents can rapidly work to cripple a business. But a rogue employee can have an effect just as crippling.

A “bad apple” can harm a business in a variety of ways. An employee can commit a crime against the business, commit a crime against the public while on the job, or even commit a crime for the business. Each act harms the business in its own unique way, and merits a different response. But proactive crisis management can help reduce the impact to a business.

One traditional method of risk management is to buy insurance. For example, a business can purchase commercial liability or fidelity insurance to help protect it against losses stemming from a security guard’s assault or a salesman’s embezzlement. But the insurance will not provide any protection unless it actually covers the loss. Any business relying on insurance as its first line of defense would be well served by evaluating its policies, to ensure that coverage will be available if necessary. While there is no replacement for advice of legal counsel, a simple evaluation may often be accomplished by consulting with the insurance broker, and asking him or her to help explain what is covered.

Fidelity policies, also sometimes called commercial crime policies, are designed to protect against employee dishonesty, but they have important limitations to coverage which are often little understood by the insured business. Such policies often exclude coverage for employees who have committed prior dishonest acts, if known to the employer. For example, a business that knowingly hires an employee with a record of crimes involving dishonesty, such as check fraud or theft, will often not be covered against losses later arising from that employee’s dishonest acts. Similarly, an employer that discovers expense account fraud or even minor theft of company property but gives its employee a second chance may not be protected by fidelity insurance against subsequent dishonest acts by that employee.

Courts have long upheld provisions such as those which provide for exclusions as to employees about whom the employer had knowledge of any fraudulent or dishonest act. See, e.g., St. Joe Paper Co. v. Hartford, 376 F.2d 33, 35 (5th Cir. 1967). While an employer may think that it has been thorough in complying with the Fair Credit Reporting Act while obtaining a background check, a failure to address a report of a fraudulent or dishonest act may trigger a policy’s exclusion. A careful employer should evaluate its coverage, and, if necessary, seek a rider specifically extending coverage to an individual with a prior bad act, or be prepared to deal with the consequences.

At times, employers are confronted with unsubstantiated allegations of wrongdoing. While employment relationships in Texas are presumed to be “at-will” absent an employer’s specific agreement to the contrary, many employers are hesitant to fire an employee on a mere allegation. But investigating allegations of illegal conduct can carry its own set of risks. Depending on how an employer conducts its investigation, it could expose itself to a claim for defamation or for violating the Employee Polygraph Protection Act of 1988. Seeking legal counsel at the outset of an investigation can spare an employer from many subsequent headaches.

Employees who take it upon themselves to break the law in a misguided effort to help the business can be the most harmful of all. From the supervisor who directs the dumping of toxic waste to the vice president who defrauds a vendor, these employees can cripple a business. Employers should promptly seek counsel in an effort to determine, among other things, whether an independent investigation is necessary, or whether the employer has an obligation to notify the authorities.

Businesses can also face exposure when an employee asks a subordinate to break the law. In Sabine Pilot Services, Inc. v. Hauck, an employee claimed that he was fired for refusing to pump bilges from his employer’s boat directly into the water. The employee sued for wrongful termination, and the Supreme Court of Texas created a narrow exception to the at will employment doctrine, allowing for a wrongful discharge claim where an employee was fired for the sole reason that he refused to perform an illegal act. Sabine Pilot Services, Inc. v. Hauck, 687 S.W.2d 733, 735 (Tex. 1985).

Regardless of the crisis’ cause, a good crisis management approach will not be static. Circumstances can rapidly change as an employer learns new facts. Evaluating whether coverage exists and providing notice to an insurer, and managing relations with the public are just a few additional considerations a business may face while trying to continue operations. A business should be prepared to address the impact of the crisis on multiple fronts, not only managing exposure to claims, but also ensuring that it does not make a bad situation worse through its own handling of the crisis. A business may not be able to control when it falls victim, but it can always control its response.