Whistleblowing in the UK – to be afraid of or to encourage?

May 2013 | EXPERT BRIEFING | CORPORATE GOVERNANCE

financierworldwide.com

The practice of whistleblowing and the laws governing it are of importance to financiers. A whistleblower can open up the companies that financiers invest in to liability, or expose wrongdoing which may damage their investment. Whistleblowing is a topical issue in the UK at the moment as a major change in legislation is due to come in force in summer 2013.

Put simply, whistleblowing is an employee’s disclosure to the employer or public or relevant body, of mismanagement, corruption, illegality, or some other wrongdoing. The disclosure may be about the alleged wrongful conduct of the employer, another employee, or a third party. Whistleblowing is a relatively recent concept; the term ‘whistleblower’ was first used by the American political activist Ralph Nader in 1972 in an attempt to avoid the negative connotations of other words such as ‘snitches’.A whistleblower can have a significant effect on a company. He or she can potentially inflict a lack of trust in the company’s management by other employees or the general public. This may result in employees resigning and poor company performance.

The most recent high profile instance of whistleblowing in the UK was when a former NHS Chief executive was forced out of his job because he put patient safety ahead of government targets. He signed a compromise agreement or ‘gagging order’ which prevented him talking about this. When he informed the press, this added further fuel to the debate on whistleblowing. Of course, whistleblowing is of crucial importance to the commercial world too. In the last few years we have witnessed Michael Woodford, the CEO of Olympus state that Olympus had wasted $1.4bn on buying companies for inflated prices as a way of covering up old losses; whistleblowers at GlaxoSmithKline revealing that drugs were promoted for unapproved uses and that the company failed to report safety data; and whistleblowers working for banks exposing the Libor scandal where rates were falsely inflated or deflated.

Different countries have different systems and cultures regarding whistleblowing. For example, in the US there is a financial incentive to disclose breaches. Where a regulator imposes a fine in excess of $1m, statute permits 15 to 30 percent of such a fine to be paid to the whistleblower. This article seeks to provide financiers with an overview on whistleblowing law in the UK, which takes a somewhat dissimilar approach.

The current legal position

The substantive law is contained within the Public Interest Disclosure Act 1998 (PIDA). The effect of PIDA is that a dismissal of an employee will be automatically unfair if the reason for their dismissal is that they have made a ‘protected disclosure’. PIDA also protects workers from being subjected to any detriment on the grounds that they made a protected disclosure.

In order to be afforded this protection a disclosure must be a ‘qualifying disclosure’.This consists of various elements:

There must be a disclosure of information.‘Disclosure’ is something which is more than merely a communication, and case law defines ‘information’ as more than merely an allegation or a statement of position. The worker must ‘convey facts’, even if the recipient already knows them. Merely gathering evidence or threatening a disclosure is insufficient.

Subject matter of disclosure.The information must relate to one of the following relevant failures: criminal offences, breach of any legal obligation, miscarriages of justice, danger to the health and safety of any individual, damage to the environment or the deliberate concealing of information about any of these categories.

Nature of the worker’s belief.A worker does not have to prove that the facts or allegations disclosed are true. They just need to have a reasonable belief that the relevant failure has occurred or is likely to occur.

The disclosure should also be a protected disclosure. The factors to take into account are:

The identity of the person to whom disclosure is made. PIDA encourages disclosure to the worker’s employer as the main method of whistleblowing. Disclosure to other specified persons and regulatory bodiesare only to be protected if further conditions are satisfied.

The disclosure must be made in good faith.Good faith broadly means acting with honest motives. Where a worker’s predominant motivation for making a disclosure is not to remedy wrongs, but he or she has an ulterior motive, the disclosure is unlikely to be in good faith.

When a company receives a whistleblowing claim it is important to make a careful assessment as to the motive of the whistleblower as in practical terms, if the Employment Tribunal thinks the employee is motivated by money, they can be very unsympathetic.

The changes to the law

Employment law is constantly in a state of flux but generally the trend is pro-employer and there are various changes in April 2013 which will be of interest, including employee owner contracts being given by employers in return for employees giving up unfair dismissal and other rights.

The Enterprise and Regulatory Reform Bill 2012-13 proposes changes intended to take effect this summer. A qualifying disclosure must in the reasonable belief of the worker be made ‘in the public interest’. A worker will not be afforded protection if the subject matter of disclosure is purely specific to him or her. For example, general bad treatment towards him or her, or a breach of his or her contract may not be deemed to be in the public interest.

Moreover, the good faith requirement for a disclosure to be protected is to be removed. However, tribunals will have a new power to reduce compensation by up to 25 percent if the disclosure was not made in good faith.

The impact of this change and advice

The ‘public interest’ requirement may promote genuine whistleblowing, and prevent false attempts by employees to expose their companies. This should be welcomed by financiers. Companies still do need to be vigilant when they are involved in risk-prone situations.

If people are able to and are comfortable with blowing the whistle internally about real issues, this is likely to improve the functioning of the company and protect financiers’ investment. However, without an American style system where employees are offered a financial reward to blow the whistle, the employees of British companies do not really have a big incentive to make a disclosure.

Financiers should encourage helpful, internal whistleblowing to preserve their investment. Where possible they should try to exercise their influence over a company with recommendations; for example suggest that a whistleblowing policy be put in place and employees know about it, that all employee concerns be investigated by management properly, and that all reasons for any decisions in relation to a whistleblower be documented.Financierswith less of an influence could just simply express their support of genuine whistleblowing policies and processes.

To conclude, whistleblowing has yet again become a very prominent and public issue. For the above reasons, the proposed changes mean that whistleblowing law will probably now be more favourable to investors. Genuine internal whistleblowing is something that should be encouraged.

Mark Symons and Richard Devall are partners and Robert Wallace is a trainee solicitor at Pitmans LLP. Pitmans LLP. Mr Symons can be contacted on 0118 957 0340 or by email: msymons@pitmans.com. Mr Wallace can be contacted on 0118 957 0602 or by email: rdevall@pitmans.com.

Mark Symons, Richard Devall and Robert Wallace

Pitmans LLP