Pandemic Underlines Whistleblowing Risks for PE

Latham & Watkins LLPIn a changing social landscape, PE firms should conduct corporate culture due diligence while also ensuring the implementation of robust complaints procedures.

As global businesses react to the pandemic and social movements, PE firms should remain watchful for whistleblowing issues involving both portfolio and target companies. We anticipate a significant increase in the number of employees asserting whistleblower status — a development that may prove costly to address, even if claims are without merit.

There is now more to blow the whistle about, including new workplace health and safety issues arising from COVID-19, misuse of government furlough schemes, and events highlighted by movements like #BLM and #MeToo. This is in addition to long-standing whistleblower issues, such as accounting irregularities, anticompetitive behaviour, and bribery and corruption. Further, in an economic environment where redundancies are increasing and the new jobs market is depressed, employees are more likely to resist termination.

What are the implications of asserting whistleblower status?

Employment jurisdiction typically determines the detail of what whistleblower status means in practice. In the US, federal and state law provide a plethora of whistleblower protections. Monetary awards from regulators provide a powerful incentive to eligible individuals who report violations. While UK regulators do not reward whistleblowers for tip-offs (and it would be rare for employers to do so), whistleblowers have enhanced protection against dismissal if they make a protected disclosure in good faith, even if the allegations ultimately prove unfounded.

For a portfolio company terminating a manager, whistleblower protections can have broad application and may afford the manager the right to argue dismissal by reasons of the disclosure. Whistleblowers can claim for uncapped compensation without needing any qualifying service, whereas compensation is usually limited and employees must have completed two years’ service to claim unfair dismissal.

As a result, we anticipate an increased focus on establishing a clear evidential trail setting out reasons for dismissal outside of any protected disclosure. Employers should also ensure they have implemented robust processes to identify and investigate potential whistleblowing allegations (which may be buried in an employee grievance or email chain). This requires collaboration between an organisation’s legal, HR, and compliance functions.

Mitigating risk by improving culture

Recent deals have, unsurprisingly, seen a greater emphasis on cultural diligence. Not only are PE firms reviewing a target’s COVID-19 response, as well as its broader health and safety procedures, but they are also seeking to better understand whether the target maintains an overall healthy corporate culture. This can include reviewing a company’s whistleblowing data, understanding how it handles reports, the outcomes it reaches, and how solutions are implemented.

While there is no perfect company culture or way of handling allegations of misconduct, when it comes to whistleblowing, a culture of “speaking up” without retribution is crucial.

From a risk management perspective, this approach helps companies to minimise employment claims and reduce the likelihood of regulatory exposure. Risk management tools (including Latham & Watkins’ Culture Assessment Framework) can help buyers and targets measure and monitor an organisation’s cultural trajectory, and identify and address difficulties should they arise. It can also be used to review companiesʼ whistleblowing processes and help businesses to adopt workable solutions.

Maintaining a compliant environment and taking the proper precautions will reduce the odds of whistleblowing claims — saving firms time and cost, while reducing the risk of reputational damage.

What Disclosures Are Protected in the UK?

A disclosure is “protected” if it is made in the public interest and to a certain category of person (e.g., the worker’s employer or certain regulators), and the worker reasonably believes it tends to show an actual or likely:

  • Criminal offence
  • Failure to comply with any legal obligation
  • Miscarriage of justice
  • Danger to an individual’s health and safety
  • Damage to the environment
  • Deliberate concealment relating to any of the above

Best Practices for Handling Whistleblower Allegations

Implement a robust whistleblowing policy outlining the process by which all whistleblowing complaints should be raised and will be investigated

Formulate a clear strategy on how any investigation into whistleblowing allegations will be handled that addresses: Who will run the investigation? Who will be interviewed? Which documents will be reviewed? How will interview questions be framed to ensure they are careful and consistent?

Manage expectations around anonymity and confidentiality of both the whistleblower and any employees interviewed as part of the investigation

Develop a clear strategy for any internal messaging and external reporting requirements arising from the whistleblowing allegation and investigation outcome

Ensure anti-retaliation measures and monitoring arrangements are implemented

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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