How to Lose $4 Million When Firing an Executive — What Happens When It All Goes Wrong?

I do not usually use this Blog to address cases I have handled. This week I’ve made an exception to this general approach, in part because a case I recently concluded has broad implications that provide useful lessons for corporations contemplating ending their relationships with their C-level executives.

I usually work as a defense attorney. However, I also counsel executives regarding their employment and future employment opportunities. On occasion, that counseling morphs into litigation, where I don the hat of plaintiff’s counsel. That is precisely what happened in late 2008, when I had the opportunity to work with Revis Stephenson. Two years later, we had won an interim award of more than $2 Million in an arbitration. Shortly thereafter, the case resolved, with the defendants paying my client $4 Million. This article addresses how this happened and how this outcome could have, and should have, been avoided.

Factual Background

Revis is an extremely bright, competent, dynamic and energetic individual who had spent much of his career in the financial services industry. In his investment banking career, Revis periodically worked with individuals establishing clean energy companies. In late-2004, however, Revis decided that rather than assisting other individuals to establish and run clean energy firms, he instead would do it himself.  Read more

Bawdy Behavior Outside of Work, Quirky Question # 151

We have several employees who periodically engage in somewhat bawdy behavior outside of work. (Surprise, surprise, sometimes alcohol is involved.) We don’t believe this behavior is consistent with the image our company would like to project. Can we discipline these employees for their conduct (which invariably is reported back to us)? Can we fire them?

Read more

Closely Held Companies and Lifetime Employment, Quirky Question # 143

Quirky Question # 143:

I read with interest your analysis of QQ # 140, dealing with closely held corporations.  We are in a similar situation, though we have the sticky additional issue you referenced of the matter involving a family member.  This person claims she is entitled to “lifetime” employment.  Given that she’s only in her late 40s, that’s a daunting prospect.  Moreover, as her siblings will attest (if forced), she simply is not competent.  Does the company really have to employ her for the next several decades?

Roy’s Analysis:

As I referenced in Quirky Question # 140, issues involving employment in closely held corporations are especially difficult when the employee involved is an owner/shareholder.  Those problems are exacerbated when the person employed is a member of the family that owns the closely held company, and is an owner/shareholder herself.

As previously addressed, the rights and responsibilities of the employer and employee alike depend on the closely held corporation law of the state in question, the decisions of your state court on these types of issues, and the particular facts of your situation.  Given that many of these cases involve fundamental issues of equity, courts scrutinize the specific factual circumstances underlying the dispute.

For example, in a seminal Minnesota case, Pedro v. Pedro, 489 N.W.2d 798 (Mn. Ct. App. 1992), a dispute arose among three brothers, each one-third owners of the family’s luggage and leather products company.  All three brothers had worked for the company for most of their adult lives.  Each brother, as an equal shareholder, received the same benefits and compensation as the others, and had an equal vote in the company’s management.

The relationship among the brother deteriorated when Alfred Pedro discovered an “apparent discrepancy” of nearly $330,000 between the internal accounting records and the company’s checking account.  The dispute regarding the missing funds resulted in the two other brothers, Carl and Eugene, firing Alfred.  When Carl and Eugene fired Alfred, they discontinued his pay and benefits.  They also informed other employees that Alfred had had a nervous breakdown, which was not true.

The trial court found that Alfred was entitled to $766,582 as damages for his one-third ownership of the company, and another $58,260 in prejudgment interest on that award.  The court also awarded Alfred $563,417 on the ground that his brothers had breached their fiduciary duties to him, as well as an additional $68,690 in prejudgment interest on that part of the award.  In addition, the trial court found that Alfred had a contract of lifetime employment and that he had been wrongfully terminated; this finding resulted in an additional award of $256,740, plus $31,750 more in prejudgment interest.  The damages for lifetime employment constituted lost wages that Alfred would have received had he worked until age 72.  Finally, the court awarded the plaintiff his attorneys’ fees.

The appellate court began its analysis by emphasizing that the “relationship among shareholders in closely held corporations is analogous to that of partners.”  Id. at 801 (citations omitted)(“close corporation has been described as partnership in corporate guise”).  As ‘partners,’ the shareholders owed each other a fiduciary duty, a relationship that imposed upon them “the highest standards of integrity and good faith in their dealings with each other,” and the obligation to treat each other “openly, honestly and fairly.”  Id. (citations omitted).

The appellate court found that there was ample evidence to support the trial court’s finding of a breach of fiduciary duty.  The two defendant brothers had not paid Alfred the monies owed pursuant to the shareholders’ agreement, interfered with his execution of his job responsibilities, hired a private investigator to follow him when he was not in the office, threatened to fire him if he did not stop inquiring about the missing funds, fabricated reasons to justify his termination, and falsely represented to other employees that he had had a nervous breakdown.  The court found that this conduct did not comport with the defendants’ obligation to treat Alfred openly, honestly and fairly.

With respect to the trial court’s finding that the plaintiff was entitled to damages for “lifetime” employment (through age 72), again the appellate court affirmed.  The Court of Appeals found that “[t]he unique facts in the record support the trial court’s finding of an agreement to provide lifetime employment to respondent.”  Id. at 803.  The appellate court noted that Carl Pedro, Sr., had worked for the company until his death.  Eugene Pedro (one of the defendants) had worked for the company for more than 50 years and Carl Pedro, Jr. had worked for the company for over 34 years.  At the time of his discharge, Alfred already had worked for the company for 45 years.  Given this pattern of longevity, the Court of Appeals found that it was reasonable for the trial court to determine that the plaintiff’s employment was NOT terminable at will.

As the Pedro case illustrates, in certain circumstances, an owner/shareholder may be able to make a persuasive argument that she is entitled to lifetime employment.  Clearly, in the closely held corporation context, general principles of at will employment do not apply.  Integrity, good faith, honesty and fairness are the touchstone principles that govern the treatment of an owner/shareholder employee.

Subsequent generations of owner/employees, however, may not be in precisely the same position as a company’s founding members.  As one New York court observed when confronted with a family member/owner/employee who left a closely held company after having been caught stealing from the business, “Even if an original participant had had a reasonable expectation of personal employment, after his death the surviving shareholders would not be bound to employ any dolt who happened to inherit his stock.”  Gimpel v. Bolstein, 477 N.Y.S.2d 1014, 1019 n.6 (Sup. Ct. 1984).  The court went on to note that the then-current owners, two generations removed from the founders, “cannot fairly be said [to have] entered into the business with the same ‘reasonable expectations’ as partners do.”  Id.

Finally, in your question you state that your employee is not competent.  Although privately held companies must ensure that shareholder/owner employees are treated with care, this does not mean that closely held corporations have no flexibility with respect to incompetent employees or employees who have engaged in wrongful conduct.  Depending on the nature and severity of your employee’s incompetence, your firm may be positioned to take appropriate disciplinary action against her, up to and including discharge.  It is important, however, that your company afford her appropriate procedural safeguards so she cannot make an argument that the company trampled upon her rights.  (This topic was covered in the recent QQ # 140, so you may wish to review that analysis if the bases for discharge are central to your situation.)

Privately Held Corporations, Quirky Question # 140

Quirky Question # 140:

We have a small closely held company. Our owners are family members and a few close friends. Happily, our company has been increasingly successful. Unhappily, one of our executives does not seem capable of growing with the company. We have made a difficult decision to get rid of this at will employee. When we advised him of this decision, he said that because he felt he had been treated unfairly for some time, he had spoken with a lawyer. He also told us that he is not truly an “at will” employee and that we owe him higher duties. He claims we have breached the covenant of good faith and fair dealing. What is he talking about?

Roy’s Analysis:

There are a number of additional pieces of information I would need from you to be able to provide you a comprehensive response to your question.  But, even without this data, I hope that I can point you in the right direction. There are some aspects about the fact pattern you described that cause me concern, and that likely will cause you some concern, as you will see from the observations below.

Before turning to the critical questions, let me make some general observations that nevertheless could be outcome determinative. First, as you likely know, there is not a federal law concerning the management of closely held corporations. Closely held companies are creatures of state law, and state laws on these issues are not uniform. Your first order of business, therefore, is to review (or have your attorney review) your state’s laws regarding closely held corporations. The degree of protection afforded your employee and the substantive and procedural rights he enjoys may be influenced significantly by these statutes and the judicial decisions interpreting these statutes. Second, even though there may be a relevant state statutory scheme, you also should explore your state’s common law to ascertain what rights are afforded your employee. As you likely know, some state statutory schemes supplant completely (or “preempt”) common law. But, in the area of closely held corporations, the preemption analysis may not apply at all or may apply only in part. Third, you did not mention in your question whether, at the time of its inception, your company established By-Laws, a Shareholder Agreement, or other fundamental corporate documents regarding the structure and governance of your company. If so, these documents could bear significantly on the rights of your majority and minority shareholders, including minority shareholders who are employees. Fourth, it is not clear from the information you provided whether your employee has a contract and whether that contract included any representations regarding duration of employment, or circumstances under which a discharge might be warranted. Fifth, your question does not really explain why you and others within your company have reached the conclusion that he is not capable of “growing with the company.” Has he engaged in misfeasance or some other wrongful conduct? Has he engaged in any conduct that clearly would justify a discharge “for cause”? Sixth, what types of feedback have you provided this employee regarding the performance deficiencies that you now have concluded warrant his termination? Keep in mind that procedural failings (e.g., no notice of his performance problems, no opportunity to rectify those problems, tolerance of the same type of problems in others, etc.) often can affect the analysis of the substantive correctness of your decision.

To recap these preliminary points: a) examine your state law on closely held corporations and the decisions interpreting your state’s statutory scheme; b) examine your state’s common law decisions that bear upon the rights of majority and minority shareholders, particularly those minority shareholders who also are employees; c) review your company’s origination documents, particularly those regarding the structure and governance of the company and any agreement describing shareholders’ rights; d) evaluate whether your executive has any contract (whether in writing or oral, including quasi-contractual arrangements) that would affect his employment rights; e) consider carefully the individual circumstances relating to this employee, focusing on why you have concluded that his performance no longer is adequate for your company; and f) assess whether you have provided adequate procedural (and substantive) guarantees for this employee.

With those preliminary observations in mind, let’s evaluate a few of the general principles that may affect your situation. In general, your employee is correct – by virtue of the fact that he is an executive in a closely held corporation, courts will hold your company to a higher standard than they would for an executive in a publicly traded company. In New York, for example, the Court of Appeals noted that the Legislature “has shown a special solicitude towards the rights of minority shareholders . . ..” In re Kemp & Beatley, Inc., 473 N.E.2d 1173, 1177 (N.Y. 1984). The courts in New York and elsewhere have emphasized the differences between shareholders in publicly traded companies and closely held companies. Owners of closely held corporations are held to the highest standards of fiduciary duty – honesty, loyalty, candor, and trust. Owners of closely held companies, and the duties they owe each other, have been compared to the relationships and duties owed among partners. Indeed, some courts have characterized closely held companies as “chartered partnerships.”

Courts also have noted that employees in closely held companies have different expectations than those in publicly traded companies. For example, in the Kemp & Beatley case cited above, the court observed, “”It is widely understood that, in addition to supplying capital to a contemplated or ongoing enterprise and expecting a fair and equal return, parties comprising the ownership of close corporation may expect to be actively involved in its management and operation.” Id. at 1178.

Quoting O’Neal, a leading commentator on closely held companies, the Court of Appeals, stated further,

“‘Unlike the typical shareholder in a publicly held corporation, who may be simply an investor or a speculator and cares nothing for the responsibilities of management, the shareholder in a close corporation is a co-owner of the business and wants the privileges and powers that go with ownership. His participation in that particular corporation is often his principal source of income. As a matter of fact, providing employment for himself may have been the principal reason why he participated in organizing the corporation. He may or may not anticipate an ultimate profit from the sale of his interest, but he normally draws very little from the corporation as dividends. In his capacity as an officer or employee of the corporation, he looks to his salary for the principal return on his capital investment, because earnings of a close corporation, as is well known, are distributed in major part in salaries, bonuses and retirement benefits.’” Id. (citation omitted).

As this analysis illustrates, courts and commentators view closely held companies differently than their publicly held counterparts. Moreover, employee shareholders are given special deference in terms of their treatment by the majority shareholders.

As noted above, states have their own independent statutes governing closely held companies. Many of those statutes discuss “oppression” of minority shareholders. Few of these statutes, however, define the word “oppression.” The question, therefore, is whether a minority shareholder/employee can argue that he has been “oppressed” if discharged. The NY courts have answered this question affirmatively. “A shareholder who reasonably expected that ownership in the corporation would entitle him or her to a job, a share of corporate earnings, a place in corporate management, or some other form of security, would be oppressed in a very real sense when others in the corporation seek to defeat those expectations and there exists no effective means of salvaging the investment.” 473 N.E.2d. at 1179.

The court held that assessing whether conduct was oppressive should be based on the complaining shareholders’ “reasonable expectations.” Id. The court stressed, “oppression should be deemed to arise only when the majority conduct substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and were central to the petitioner’s decision to join the venture.” Id.

Several key themes are evident from the many New York cases addressing these issues. First, oppression is judged in large part on the minority shareholder’s “reasonable expectations.” Second, the standard is objective, not subjective. Third, the expectations are not confined to the issue of dividends or valuation – expectations also may relate to an ongoing role in management, continued employment, and/or other facets of corporate involvement. Fourth, it is not enough for a minority shareholder merely to express “disappointment” with the majority’s decisions. (Again, as the Kemp court observed, “Majority conduct should not be deemed oppressive simply because the petitioner’s subjective hopes and desires in joining the venture are not fulfilled. Disappointment alone should not be equated with oppression.”)

As reflected in your question, you consider your employee to be employed “at will.” In general, absent a contract of employment defining the duration of employment and/or the grounds for discharge, a company’s employees are employed “at will.” This means that an employee may be discharged at any time, for any (legal) reason, or no reason at all, with or without notice. With few exceptions, this basic tenet of employment law has little to no applicability for a minority shareholder of a closely held corporation who also is an employee. As described above, both state legislatures and state courts have demonstrated “special solicitude” for the rights of the minority shareholder. This solicitude applies equally to the minority shareholder in his/her status as an employee.

This does not mean, however, that a minority shareholder/employee can never be terminated. Although the playing field is tilted decidedly in the employee’s direction, there are at least two alternative analyses that can justify a closely held company’s decision to terminate an employee shareholder. First, the courts have looked to the legitimate interests of the controlling, or majority, shareholders and their need to manage the company effectively. Second, the courts have assessed the terminations of shareholder/employees from the “good cause” perspective.

Even those courts that impose partner-like fiduciary obligations (good faith, candor, loyalty, etc.) on the majority shareholders have recognized that majority shareholders must have some flexibility to manage and run the company. These courts have concluded that the otherwise high standards of fiduciary duty cannot be used to stymie the legitimate actions sought by the majority shareholders, even if those actions have some adverse consequences for the minority shareholders. As explained by the Supreme Court of Massachusetts, “we are concerned that the untempered application of the strict good faith standard . . . will result in the imposition of limitations on the legitimate action by the controlling group in a close corporation which will unduly hamper its effectiveness in managing the corporation in the best interest of all concerned.” Wilkes v. Springside Nursing Home, Inc., 353 N.E.2d 657, 663 (Mass. 1976). The court identified several areas where the majority shareholders needed to maintain both control and flexibility: declaring or withholding dividends; deciding whether to merge or consolidate; establishing the salaries of corporate officers; dismissing directors without cause; and hiring and firing corporate employees.

The Wilkes court went on to establish a two-part analysis to evaluate actions taken by the majority shareholders that would benefit the corporation but arguably disadvantage the minority shareholders. First, the courts should examine “whether the controlling group can demonstrate a legitimate business purpose for its action.” Id. Second, the courts must “weigh the legitimate business purpose, if any, against the practicability of a less harmful alternative.” Id.

The question then becomes whether there is a less harmful alternative to discharging your executive. Perhaps you could provide him a chance to demonstrate that he too can grow with the company. Or perhaps you could provide him a “last chance” warning to demonstrate that he can meet your company’s legitimate performance expectations. Alternatively, another less harsh option would be to alter his position, possibly with a commensurate reduction of his salary. These alternatives are not risk free, especially for someone who, as he advised you, already has retained counsel.

The alternative analytical model that some courts have utilized is to require that the discharges of minority shareholder/employees meet a “good cause” standard. The notion simply is that there must be some circumstances under which a non-performing minority shareholder/employee can be discharged. For example, if an employee engaged in workplace violence, the company must be free to discharge him even if he is a minority shareholder. Conversely, however, if the employee merely engaged in periodic absenteeism or demonstrated performance deficiencies in some other non-material way, it is doubtful that good cause could be established.

The bottom line is that your employee does have rights that do not exist for most employees. Your majority shareholders owe the minority shareholder/employee significant fiduciary duties. Moreover, as the discussion above illustrates, these duties take your executive out of the “at will” context.

In addition, as long as your employee remains employed, he will have additional rights that should be honored scrupulously by your company. You should assume that your company’s future conduct will be scrutinized closely by your executive employee, his lawyer, and ultimately, the court. As difficult as it is to manage a current employee who is suing or threatening suit, as long as he is employed, you owe him significant obligations. [I did not ask whether your executive falls in the category of "family" that you referenced above, or whether he merely is a "close friend." If the former, the potential tensions could be exacerbated further.]

It is beyond the scope of this discussion to delineate all of the statutory and common law rights that may be available to your company. I will revisit those issues some time in the future. But you should familiarize yourself with the statutory requirements that may be imposed on your company with regard to this employee. Your failure to do so could enhance his argument that he is being treated unfairly by the company.

Accessing Pornographic Websites, Quirky Question # 109

Quirky Question # 109:

We recently discovered that one of our company’s computers was used to access pornographic websites.  Many different employees had access to this computer, but we believe we know who is responsible.  In part, our conclusion is based on the fact that he is the only male employee who has access to that computer.

We’re thinking about terminating his employment based on our impressions.  Frankly, we would rather be sued by him than by our female employees who use that computer, a number of whom complained about the pornographic websites that now often pop up on the computer.  Any risks associated with terminating the male employee?

Roy’s Analysis:

Whoa, slow down! As one of our readers remarked in response to this question, don’t jump to the conclusion that the person responsible for accessing the pornographic Websites is your male employee, simply because only one male employee had access to the computer in question. (See the reader’s reaction below.) Although your intuition may be correct, and your male employee may indeed be the person who visited the pornographic Websites, it would be imprudent for you to terminate this employee before conducting an appropriate investigation.

The investigation could consist of several parts. First, presumably a forensic analysis of the computer in question should enable your company to determine which sites were accessed and when.

Second, you could compare the times these sites were accessed with your employees’ work records. If, for example, your work records demonstrated that your male employee was on vacation during a week when the pornographic Websites were repeatedly accessed, that is pretty exculpatory evidence. Conversely, if he was the only employee working when the Websites were being contacted, the opposite inference is warranted.

Third, you should evaluate whether employees needed to log on to access the computer. If so, this could reveal important information to you.

Fourth, regardless of the outcome of your forensic analysis, I recommend that you interview the employees who had access to the computer. Find out what the employees have to say about their use of the computer, their access to the Websites, etc. Discharging an employee without at least interviewing him or her about the wrongful conduct will likely have at least three consequences: a) it will increase the likelihood that your decision is misguided or based on erroneous data; b) it will increase the likelihood of litigation by the discharged employee; and c) it will increase the likelihood that the fact-finder, whether judge or jury, will perceive your approach to have been procedurally unfair. Gather the pertinent facts. Give the employees a chance to offer any exculpatory evidence. Consider the information collected during the interview process. Then, make your decision.

Fifth, it is possible that just one employee accessed the pornographic Websites. But, it also is possible that multiple employees were visiting the sites. If both male and female employees were accessing the Websites and there was not a demonstrable distinction in their conduct, it would be unwise for you to terminate or otherwise discipline just one of those employees. If, however, there were significant differences in the employees’ conduct, a differential disciplinary response may be appropriate. For example, one of the employees may have been responsible for visiting the sites or adding them to a “Favorites” list, while other employees simply may have accessed them once they were available. Similarly, one of the employees (or several of the employees) may have accessed the sites frequently, whereas for others, there may have been one and only one visit. For example, one of the employees may have forwarded information or pictures from the Websites to others in your company, whereas other employees may not have. These, or other distinctions, may warrant a different disciplinary response.

Some of these issues were recently addressed by the Seventh Circuit Court of Appeals in the case of Farr vs. St. Francis Hospital and Health Centers, No. 08-3203 (June 29, 2009). Farr sued the defendant hospital for sex discrimination after being discharged. Farr, one of seven respiratory therapists at St. Francis (and the only male in that position), shared a computer with the other respiratory therapists. Although the computer required the employees to log on with a user name and password, and although employees were supposed to log off when they were finished using the computer, the standard practice was that one employee would log on in the morning and all of the employees would use the computer under that person’s name throughout the course of the day.

One employee noticed that several “lurid” and “obscene” Websites had been added to the computer’s “favorites” list and notified HR of this issue. Farr was the person who had logged on to the computer at the time the Websites were accessed. Farr was interviewed and denied knowledge of why the sites had appeared at the time he was logged on to the computer. Consequently, the computer was then sent to the hospital’s Information Services Department for a forensic analysis. After the IS Department analyzed the hard drive, it wiped the hard drive of all information, without imaging the hard drive. (Needless to point out, this is not a best practice and would not have been done by any competent forensic analyst. The hard drive itself or a copy of the hard drive should have been retained.)

St. Francis then compared the times when the computer was used to access the Websites with the respiratory therapists’ work schedules. That comparison showed that Farr was the only employee who had worked on a particular Sunday when the computer had been used extensively to access the pornographic Websites. (The computer also had been used to access “hacking” Websites, an issue of equal concern to the Hospital.) Farr was interviewed a second time and still denied using the computer for inappropriate purposes. Consequently, further investigation was conducted, which corroborated the fact that other employees had not used the computer to access the pornographic or hacking Websites. Based on the investigations conducted, Farr was fired.

Farr then sued for sex discrimination, contending that he had been fired because he was a male. Farr retained his own forensic computer expert. Farr’s expert determined that the pornographic Websites had been added to the computer through “mal-ware” (malicious-software) when it was otherwise being used for a proper purpose and without Farr’s knowledge. Nevertheless, in connection with the information he provided his own expert, Farr admitted accessing 17 of the 31 Websites at issue. Farr reiterated these admissions when he was deposed.

Farr attempted to prove his case with both direct and circumstantial evidence. As the appellate court pointed out, when the person claiming discrimination is a member of the majority, he “must set out ‘background circumstances’ that show the employer discriminates against the majority or he must show that there is something ‘fishy’ going on.” (Citations omitted.) [Frankly, I was unfamiliar with this precise legal standard – in the future, I will have to test the factual patterns of my cases against the “something fishy” standard.]

Farr’s initial complaint was that he was the first person investigated about the pornographic sites, a fact he attributed to his gender. The appellate court quickly dispensed with that argument. “That complaint would have more force if it were not also true that he was not the person logged on to the computer at the time the sites were visited. It seems quite sensible (and hardly discriminatory) to begin an investigation with the person who officially was logged on to the computer.”

The court also rejected Farr’s argument that regardless of who had been investigated first, he was fired because of his gender. As the court pointed out, he was fired because the “investigation convinced the employer that he was the one accessing the inappropriate Web sites. In fact, he admitted it.” Finding that Farr had not established anything “fishy” about his discharge, the Seventh Circuit affirmed the lower court’s grant of summary judgment for the employer.

In the Farr case, the employer got it right – it conducted an appropriate investigation to ascertain the underlying facts. Based on the information adduced in the investigation, it made an appropriate termination decision. Although even legitimate discharge decisions sometimes result in litigation, the hospital’s position was quickly vindicated by the lower court’s summary judgment decision, a decision affirmed on appeal. The Farr analysis illustrates the steps your company should pursue before acting precipitously to terminate your male employee. (The decision also illustrates one part of the hospital’s investigation that should be avoided, i.e., destroying the hard drive.) Investigate the facts and then act accordingly. Doing so should minimize the likelihood of litigation by your male employee.

Finally, there are steps that you can take to reduce the likelihood that any of your female employees will sue you. Remove the computer during the investigation. Replace its hard drive before it is put back in service. And use the situation as a “teaching moment,” reminding your employees of their need to comply with both your sexual harassment policy and your electronic communications policy. If your company takes prompt and appropriate action to address the concerns brought to your attention, the chances that you will be sued by one of your female employees are not high. The chances that your company would be found liable, in the event a suit is brought, are even lower.

As noted above, one of our readers provided her reaction to this question. She wrote,
“Why would you want to take the risk by firing anyone, especially since you have absolutely no proof…only gender. You are opening yourself up to a gender discrimination lawsuit. I would suggest you gather everyone together who had access to this computer, give them all a reminder of your electronic systems usage policy (assuming you have one) have them all sign for it and indicate to the that a repeat occurrence will not be tolerated and you will be watching content from that, and all computers, going forward and that further inappropriate use will result in severe disciplinary action. I recently read an article about viewing of porn, and 1 in3 women are currently reviewing pornographic Websites of one kind or another. You should not just assume it is the man and risk ruining his reputation on a guess.”