Charles Newman and Christina Morton of Beachcroft Wansbroughs look at some of the ways you can reduce legal risks associated with employee fraud.
Employee fraud can cost an employer dear. If one of your employees is defrauding your customers and clients as well as you, you will not only have a direct loss but are also likely to be vicariously liable for any client/customer losses. The long-term damage to reputation can be just as costly as the immediate financial damage.
Acting on suspicions
If you are faced with evidence of fraud, your instinctive reaction may be to suspend a suspected employee to stop further losses, or to start monitoring the suspect's activities. However, both steps require some prior thought.
Tactically, you need to choose the right moment to suspend. Suspension can be an invaluable means of quickly preventing further loss or damage without having to dismiss the employee. However, premature suspension may result in the evidence of fraud being insufficient to establish that the employee really is guilty of dishonest conduct. This would make it difficult to dismiss the employee without risking an unfair dismissal claim.
Suspension carried out as a knee-jerk reaction poses a further risk. Current case law enables an employee who has been suspended unjustifiably to recover damages for breach of trust and confidence, or breach of the employer's duty of care. If the suspension leads to some form of psychiatric damage, such as depression or stress, then a claim for personal injury may follow. Do not suspend without some substantial reason, and certainly not on the basis of gossip or hearsay.
Employers may have many reasons for monitoring their employees that have nothing to do with dishonesty, but a suspicion of fraud is a clear pretext for carrying out checks. You may need to read e-mails, record telephone calls, listen to voicemail messages, or check telephone numbers. What restrictions does the law impose?
The Regulation of Investigatory Powers Act 2000 makes the interception of telecommunications (which include e-mail) an offence unless certain conditions are met – in particular first obtaining the consent of the monitored individual. However, the conditions under which employers can intercept employees' communications without consent, and without breaking the law, are set out in regulations on lawful business practice which have been in force since October 2000. These conditions include the prevention of crime, so the regulations give employers considerable scope.
Employers intending to intercept communications without consent need to make all reasonable efforts to inform employees that they are going to do so – although this does not mean that employees have the right to object. You should ensure that the contract of employment, staff handbook or relevant policy contains a clear statement that you may monitor telephone calls and e-mails, including those which are ostensibly personal.
There is a school of thought that these regulations do not comply with the Human Rights Act 1998, but so far there has been no legal challenge.
The Data Protection Act 1998 (DPA) is more complex. It governs the processing of personal data electronically or manually, and requires the processing (which is very widely defined) to be carried out in accordance with eight data protection principles.
Many activities carried out with the aim of fraud detection will be caught by the Act, including monitoring a telephone call or e-mail from which an individual can be identified, scrutinising transaction records which carry codes or file paths from which an individual can be identified, and reading papers from which an individual can be identified, provided these are held in an 'organised filing system'. (This would encompass personnel or management records, or records of transactions identifiable as having been carried out by a particular employee.)
The Information Commissioner, who is responsible for enforcing compliance with the DPA, is in the process of issuing a four part Code of Practice. Following consultation, the part of the Code which deals with monitoring is being substantially re-written. Until it is published, later in 2003, employers are left without practical guidance on how to monitor without breaching the Act.
However, previous versions would not have stopped employers carrying out fraud detection activities, provided there were genuine suspicions of illegal activity, and the measures used were no more intrusive than necessary.
The disciplinary process
If you uncover evidence of employee fraud, you still need to move carefully. The fraud may well amount to gross misconduct and justify dismissal without notice or compensation, but if you jump the gun and dismiss without further investigation and process, you could face an unfair dismissal finding.
Once you have obtained evidence of fraud, you need to take the investigation a stage further. You must notify the employee of the charges, present him with the facts and give him a chance to put his side of the story at an internal disciplinary hearing. He has the right to be accompanied by a work colleague. Later this year, the Employment Act 2002 will bring in contractually binding minimum disciplinary procedures for all employers, with penalties for non-compliance.
After the disciplinary hearing, you are entitled to reach a decision on whether to dismiss or not.
Deciding when and whether to involve the police can be difficult. If you bring them in while you are still questioning your suspect, the latter may refuse to co-operate further for fear that he could incriminate himself for a future criminal trial. Nor should you rely solely on a police investigation; if you do not conduct your own, it may render a dismissal unfair.
Once you have investigated, however, you do not necessarily have to wait for the outcome of a police enquiry or a criminal trial before dismissing. The police will be seeking to prove fraud beyond reasonable doubt, whereas you only need a reasonable belief in the employee's guilt on the balance of probabilities. The standard of proof is significantly lower.
Charles Newman is a partner and Christina Morton is a professional support lawyer at Beachcroft Wansbroughs, solicitors. Tel: 020 7894 6646, E-mail: firstname.lastname@example.org / Tel: 020 7894 6712, E-mail: email@example.com