Safeguarding Reputation: How to Evaluate Financial Services Employee Off-Duty Conduct

Takeaways

• Financial services employers have a legitimate interest in protecting integrity and maintaining public confidence in their institutions when evaluating employees’ off-duty conduct. 
• Employers should focus on whether off-duty conduct relates to a legitimate business concern. 
• A consistent, well-documented process can help manage employers’ reputational concerns and legal risk.

Article

In an era of instant public scrutiny, employers are increasingly responding to employees’ off-duty conduct that threatens their reputation, particularly in the financial services industry, where public trust and confidence are critical.

In general, when evaluating employees’ off-duty conduct for corrective action, employers should focus on the conduct’s demonstrable connection to the job duties, impact on workplace operations or regulatory obligations, or effect on other legitimate business necessity. By grounding their employment decisions in legitimate business concerns rather than vague “reputational risk,” employers can reduce legal exposure while protecting the public trust on which their businesses depend.

Because of the heightened public expectation that financial service providers employ trustworthy people to handle their money, Section 19 of the Federal Deposit Insurance Act (12 U.S.C. § 1829) sets a high bar by prohibiting, for a specified period, a person from participating in the conduct of the affairs of an FDIC-insured bank if they have been convicted of certain crimes involving dishonesty or breach of trust or money laundering offenses. Courts have also recognized this enhanced expectation for employee conduct outside the workplace and explained how to assess the conduct’s possible relatedness to the business. In an unpublished appellate case (Ela v. California Unemployment Insurance Appeals Board, 2016 Cal. App. Unpub. LEXIS 8739 [Nov. 1, 2016]), the court provided an illustrative example from the California Code of Regulations (22 CCR 1256-33):

[A]n official of a local bank, is arrested and convicted for theft. The bank’s business reputation is damaged. This would be so even if the theft was not from the bank and committed during off-duty hours. On the other hand, the off-duty theft by a janitor of this same bank would have little effect on the bank’s reputation and public trust and confidence in this bank. A discharge of the bank official would be for misconduct connected with the work. A discharge of the bank’s janitor would not be for work-connected activity.

What should an employer do when an employee’s non-criminal, off-duty conduct poses a risk to the public’s trust in the institution? While reputational risk is often a legitimate business concern, employers should also articulate the business justification for any adverse employment decision.

Because financial services institutions operate on a foundation of public trust and face “reputational risk,” they increasingly use background checks, adverse media searches, and social media reviews to identify potential concerns before and during employment. These steps are intended to balance reputational harm with litigation risk.

Employers should recognize an important limitation: Conducting due diligence does not create an obligation to know everything, nor does the discovery of concerning information automatically justify an adverse employment action. Once information is uncovered, employers should carefully assess both the business and legal risks associated with acting on that information.

Balance Reputational Risk with Employment Law Obligations

Financial institutions routinely make risk-based decisions regarding customers, counterparties, and business relationships. Employment decisions must comply with anti-discrimination laws, retaliation protections, fair-credit-reporting requirements, and applicable state and local employment statutes. Accordingly, employers should avoid rigid approaches to decision-making.

Employers should be mindful of the legal parameters of evaluating off-duty conduct before taking adverse action, even if the conduct legitimately could undermine public confidence in the employer. For example, a financial advisor posting get-rich-quick schemes on their public Instagram may undermine client trust, which is essential to their role. However, a non-client-facing employee may be held to a different standard, depending on the conduct. Before taking adverse action, employers should identify and document how the conduct affects a legitimate business concern.

Focus on the Rationale

Defensible employment decisions are those supported by a demonstrable, job-related rationale rather than generalized concerns.

Can a social media policy be a legitimate basis for termination? It depends. In Ellis v. Bank of N.Y. Mellon Corp., 837 F. App’x 940 (3d Cir. 2021), the U.S. Court of Appeals for the Third Circuit affirmed summary judgment for a bank, finding that the employee failed to establish race discrimination after being terminated for a social media post that the court found was materially “more egregious” than posts made by purported comparators. Although the court relied heavily on the employer’s social media policy and the discretion the policy afforded management, discretion is not a substitute for process. The court’s reasoning in this unpublished decision shows that employers should ensure that adverse employment decisions are grounded in legitimate business concerns and implemented in a manner consistent with applicable employment laws.

Focus on How Information is Used

Employment-law exposure often arises not from conducting diligence itself, but from how the information is used.

Common risk areas include:

• Reliance on information revealing protected characteristics, such as religion, race, age, disability, or other legally protected statuses.
• Actions that may be viewed as retaliation for complaints, whistleblowing, or other protected activity.
• Inconsistent treatment of similarly situated employees.
• Reliance on vague references to “culture,” “fit,” or “brand” without a clear business justification.
• Screening practices that disproportionately affect protected groups without sufficient justification.

Court decisions addressing employee social media activity emphasize that while employers may have legitimate concerns about reputational harm, those concerns do not automatically justify adverse employment actions. Courts continue to scrutinize whether the employer can demonstrate a legitimate business rationale that has been applied consistently and without discriminatory or retaliatory motive.

Steps to Balance Reputational and Legal Risks

To balance reputational concerns with employment law obligations, financial institutions should consider the following steps:

1. Establish clear standards. Workplace policies should identify the types of conduct that may raise reputation, compliance, or operational concerns and avoid overly subjective standards. Social media and workplace conduct policies should establish clear expectations that protect the institution’s reputation while remaining consistent with applicable employee protections and legal obligations.
    
2. Apply role-specific criteria. Every position carries a different risk profile. Screening and adjudication standards should reflect the responsibilities of the role.
    
3. Limit exposure to protected information. Where possible, review processes should distinguish relevant risk information from protected personal characteristics.
    
4. Require HR, legal, and compliance review. Potentially significant employment actions based on social media content, adverse media, or background check findings should be reviewed by the HR, legal, and compliance departments before a final decision is made.
    
5. Document the decision-making process. Employers should preserve records demonstrating the legitimate business rationale, the role-specific analysis performed, and the consistency of treatment across comparable situations.

Focus on Process, Not Perfect Knowledge

Financial services employers have a legitimate interest in protecting institutional integrity and maintaining public confidence. Background checks, adverse media reviews, and other due diligence measures are important tools in that effort. However, once potentially concerning information is identified, employers should pause and evaluate not only the reputational implications but also the legal consequences of acting on that information.

The goal is not perfect knowledge. Rather, a thoughtful, consistent, and well-documented process that connects legitimate business concerns to employment decisions while minimizing the risk of discrimination, retaliation, or other employment-law claims is the aim.

For support in assessing employment actions related to reputational risk factors, contact a Jackson Lewis attorney.

(Summer Associates Zachary Richman and Karus Sabio contributed to this article.)