Managerial Ethics in Employee Relations: Leading with Integrity and Principle

In today’s swiftly changing workplace, managers face a myriad of ethical challenges that test their leadership, decision-making, and moral compass. From handling employee conflicts to navigating corporate policies, ethical dilemmas arise in ways that aren’t always clear to the untrained or "unaware" eye. While legal standards provide a framework for compliance, ethical leadership goes beyond the law—it’s about fostering trust, fairness, and integrity in every interaction.

When I authored the book Workplace Ethics: Mastering Ethical Leadership and Sustaining a Morale Workplace (HarperCollins Leadership, 2022), my goal was to help frontline operational leaders and department heads work through moral dilemmas that might come their way at any time while managing their teams. I wanted to ensure that leaders understood their rights, held themselves accountable to the highest standards of performance and conduct, and knew when to escalate matters to get a proverbial “hot potato” off their lap.

While ethics seems to be getting short shrift in today’s busy business environment, it’s truly the mortar that holds together a company’s bricks. It’s the ”in-between stuff” that serves as a glue, marrying performance, conduct, behavior, and emotional intelligence to drive greater employee engagement and discretionary effort. Put simply, without a healthy moral compass, companies could quickly go astray in terms of productivity, goal attainment, retention, and other key growth factors that make organization successful.

A Business Manager Pondering an Ethical Dilemma

Understanding Ethical vs. Legal Standards

It all starts with a basic understanding of ethical versus legal standards. One of the most common misconceptions in managerial ethics is equating legality with morality. Just because something is legal doesn’t mean it’s necessarily ethical. For example, a company may legally downsize its workforce without warning, but ethically, providing employees with adequate notice and support would be the right/better/more beneficial thing to do—both for the exiting workers as well as the remaining ones.

Likewise, some organizations famously notify their employees of their termination by email, informing them of their dismissal in the most impersonal way, while requiring them to pack their belongings and leave the premises. Is it illegal to do so? Of course not. But the lingering feelings of anger and resentment may trigger a desire for workforce revenge—typically found in wrongful termination lawsuits or potential workplace violence. Plus, the message to the remaining employees is that you’re replaceable and not at all important. Probably not the best approach to building employee morale and loyalty.

Ethical leadership requires managers to ask: Is this decision fair? Does it align with our values? How will it impact employees and the workplace culture? These questions help leaders navigate the gray areas where legal compliance alone isn’t enough. In reality, the legal bar is set very low: just enough to ensure no one violates the law, gets sued, or goes to jail. The ethical standard is much higher: a standard or expectation to ensure that people feel respected, that equality of opportunity is available, and that consistency in a company’s actions or the application of its rules can lead to employee peace of mind, security, and what's become known as "psychological safety."

Common Ethical Challenges in the Workplace

Managers often encounter ethical dilemmas that require careful thought and principled action. Here are a few real-world examples:

• Favoritism in Promotions: A manager may feel pressured to promote a close friend over a more qualified candidate. While there’s no legal violation, this decision undermines fairness and morale.

  
  

• Handling Employee Misconduct: Suppose the highest-performing sales employee in the branch treats others disrespectfully or is otherwise labeled as a “toxic.” Should the manager look the other way and sweep matters under the rug for fear of losing that top biller or address the matter openly and transparently, ensuring consistency, accountability, and high standards of conduct for everyone on staff?

• Disclosing Conflicts of Interest: A manager who hires a relative without disclosing the relationship may create an unfair advantage, leading to resentment among employees. Ditto for a manager who initiates a personal (dating) relationship with a subordinate without disclosing it. Disclosure typically leads to a simple solution: transferring the subordinate to another manager. Failure to disclose dating relationships can lead to claims of harassment and retaliation if the personal relationship ends, leading to the manager’s immediate termination and leaving the organization open to significant liability.

When facing a potential conflict of interest, managers have an affirmative obligation to disclose and escalate the matter to management—their boss, human resources, the company’s legal department, or ombuds office. Failure to do so could constitute egregious misconduct in and of itself. And remember, as a manager, you can’t be the monkey that covers your eyes, ears, and mouth, purposely looking away from an incident and not willing to get involved. It doesn’t work that way for managers, supervisors, department heads, or members of the C-suite. Once one member of management is made aware of a potential problem, then the entire organization is deemed to be placed on notice in the eyes of the law. Legal defenses of “deliberate ignorance” or “willful blindness” will not hold up in court. As a manager, you have an obligation to be aware.

Corporate Responses to Unethical Behavior

Organizations must take unethical managerial behavior seriously. Companies that ignore ethical violations risk damaging their reputation, losing employee trust, and facing legal consequences. Effective corporate responses include:

• Whistleblower Protections: Encouraging employees to report unethical behavior without fear of retaliation.

• Ethics Committees: Establishing dedicated teams to review ethical concerns and ensure accountability.

• Conflict of Interest Disclosures: Documenting (typically annually) disclosures of family or romantic relationships within the organization or other “red flag” areas that could potentially lead to legal or other consequences, including family relationships with vendors or suppliers.

• Corrective Action: Implementing disciplinary measures for managers and employees who violate ethical standards.

When it comes to this last point—corrective action—make sure that your employees understand that when it comes to misconduct matters, “the issue drives the outcome.” That means that the company may not be able to “save” someone who engages in egregious misconduct like timecard fraud, theft, embezzlement, or forgery. In such cases and as is often the case with serious cases of employee misconduct, the company’s only response is immediate termination, known as a summary dismissal, regardless of a worker’s tenure, history, or other considerations.

Think of egregious misconduct as a “third rail” issue: If someone steps on the third rail outside or between the subway tracks, they’ll be electrocuted and dead before their knees hit the floor. It doesn’t matter if they’ve been with the organization for thirty years, are the employee of the year, or are otherwise a superstar performer. In cases of theft, forgery, embezzlement and the like, a company is left with no other choice but to terminate immediately.

Likewise, investigations may not be able to prove to an absolute standard that some type of egregious misconduct (for example, harassment) occurred. But companies have the right to issue a final written warning--even for a first offense--stating that immediate termination will result if the employee ever again engages in misconduct of that sort. The document may likewise contain “last chance agreement” language that states: “This is your last chance. Your job is in immediate jeopardy of being lost.” Ouch!

Understand that performance- or attendance-related issues are typically not handled the same way as conduct or behavioral issues. When it comes to performance and attendance, steps are often followed in what’s known as “progressive discipline.” For example, a first written warning may be followed by a second written warning and ultimately a final written warning before someone is terminated. (Think of the classic “three strikes before you’re out” paradigm.)

But that’s NOT what you should expect with conduct-related infractions. Companies have much more discretion to escalate through and beyond the traditional progressive disciplinary paradigm and start with immediate termination or a final written warning, even for a first offense. Teaching this difference to your operational leaders and employees alike is a big step in raising awareness about your organization’s “code of conduct,” “business conduct policy,” “business ethics statement,” or the like.

Remember, managers and workers alike are often not taught about such distinctions in how organizations typically address performance versus conduct infractions. Ensure everyone is aware of the special considerations involved in egregious misconduct matters so there are no surprises along the way. . . and employees refrain from engaging in questionable conduct-related activities in the first place.

Practical Solutions for Ethical Leadership

To navigate these challenges, managers can adopt ethical leadership strategies that protect themselves and the company and that sustain high employee morale:

1. Transparency and Open Communication: Encourage honest discussions about ethical concerns and ensure employees feel safe reporting misconduct.

2. Consistent Policies and Fair Treatment: Apply rules uniformly to prevent claims of favoritism and bias.

3. Lead by Example: Demonstrate integrity in decision making, showing employees that ethical behavior is valued.

4. Encourage Ethical Decision-Making: Provide training and resources to help employees recognize and address ethical dilemmas.

To this last point, teach new hires about the ethical rules of the road in the workplace, especially since these topics are rarely covered in school. For example, most recent graduates have no idea that timecard fraud is a terminable offense—even for a first occurrence. Time is a proxy for money in the workplace, so stealing time is treated like stealing money, plain and simple. Newly minted graduates may assume that they may be disciplined for falsifying timecards without realizing that timecard fraud is a “summary offense”—an immediate termination for cause without any prior disciplinary action.

So, yes: employees may be terminated without prior disciplinary warnings. And managers have a lot more discretion to progress through the disciplinary paradigm when egregious misconduct is at hand than they might otherwise think. Too many managers mistakenly assume that all disciplinary matters must "begin with a verbal warning." That's a mistaken assumption. Managers need to understand that the organization has much more discretion with conduct-related matters. Read that: Don't shy away from a bully employee for fear that "starting with a verbal" will only enrage the person. Instead, speak with HR (or Legal if you company doesn't have an HR department), and consider issuing a final written warning for egregious misconduct, including insubordination, so that you and your team no longer have to suffer from the individual's bulling behaviors.

Ensuring an Ethical Workplace

To maintain a principled and moral workplace, managers can adopt the following strategies, which should be discussed with their teams from time to time during staff meetings or special meetings:

• Foster a Culture of Integrity: Make ethics a core part of company values and daily operations.

• Encourage Ethical Leadership Development: Provide mentorship and training for managers to strengthen their ethical decision-making skills.

• Recognize and Reward Ethical Behavior: Celebrate employees who demonstrate integrity and fairness.

Likewise, consider the “Values-Based Leadership” model that encourages managers to share with their teams what core values they stand for and believe in. A simple one-sheet listing the manager’s core values can go a long way in helping employees understand what’s expected of them. Highlighted values could include, for example:

·         Bringing out the best in your peers and always having one another’s backs.

·         Holding yourself accountable to the highest standards of performance and conduct.

·         Serving as a role model behavior-wise in terms of selfless leadership (i.e., putting others’ needs ahead of your own and expecting them to respond in kind), empathetic leadership, and paying forward your strengths and special skills.

Living your values at work makes for a much stronger workplace experience. One word of caution, though: Before you issue a values-based one-sheet to your employees, check with your company’s HR or legal team to ensure what you’ve written (and how you’ve written it) is consistent with company policy and practice.

For more information on values-based leadership, see the following SHRM article titled “Values-Based Leadership in Action” by Paul Falcone dated June 9, 2022:  

https://www.shrm.org/topics-tools/news/employee-relations/values-based-leadership-action 

Practical Examples of Ethical Challenges that Managers May Face in the Workplace and Reasonable Solutions

Managers encounter a variety of ethical dilemmas in the workplace, some of which can be quite tricky to navigate. The following examples highlight the importance of ethical leadership in maintaining a principled workplace, along with potential solutions:

1. Handling Employee Misconduct

Scenario: A high-performing employee is caught falsifying reports to make their department look better. The manager is torn between addressing the issue or overlooking it due to the employee’s high levels of performance and productivity.

Solution: Ethical leadership requires accountability. The manager should address the misconduct first with their boss and then potentially with HR. This ensures fairness, consistency, and transparency since HR can confirm that the company’s response in this current situation mirrors and is consistent with how similarly situated cases were handled in the past. Depending on the nature of the report falsification, a written warning, final written warning, or outright termination may result.

Such discussions should always be escalated to management and HR for proper consideration. (If your company doesn’t have an HR department, it’s often wise to involve corporate legal or outside legal counsel before taking action.) Once the discussion with senior management and HR is held, the manager can then meet with the employee to learn their side of the story and then potentially issue the disciplinary document, if warranted. Again, getting management buy-in first--before addressing the matter with the employee--is often the best way to go when it comes to conduct- or behavior-related infractions.

2. Conflicts of Interest

Scenario: A manager hires a relative without disclosing the relationship. Other employees feel the hiring process was unfair and suspect the relative will receive favorable treatment.

Solution: Transparency is key to ethical leadership. The manager should disclose personal relationships in hiring decisions and ensure all candidates are evaluated objectively. Some companies have policies against nepotism to prevent such conflicts. Hiring a family member as a direct report (subordinate) without disclosing it to management will likely result in a final written warning for or outright termination of the manager, depending on the circumstances.

3.    Ethical Use of AI in Hiring

Scenario: A company uses AI algorithms to screen job applicants. However, the system unintentionally favors certain demographics in its candidate recommendations, leading to potential discrimination in the form of adverse or disparate impact claims. (Adverse impact and disparate impact, both related to discrimination, are distinct concepts. Adverse impact refers to the negative consequences of a neutral employment practice that disproportionately affects a protected group. Disparate impact, in comparison, is the legal theory that holds employers liable for adverse impact if it is caused by an unlawful employment practice.)

Solution: Managers should regularly audit AI-driven hiring tools to ensure fairness. Human oversight in the final hiring process helps prevent bias and ensures ethical recruitment practices. In other words, if you see a problematic pattern arise in the applicant pool based on AI recommendations, bring the matter to HR’s attention immediately. (The AI prompt that identifies applicant skills, knowledge, and aptitudes may need refinement and adjustment.)

4.    Whistleblower Protection

Scenario: An employee reports unethical behavior by a senior manager but fears retaliation.

Solution: Companies should have strong whistleblower protections in place. Encouraging anonymous reporting channels and ensuring that whistleblowers are safeguarded from retaliation fosters a culture of integrity. As a manager, it’s fair for you to share with your team that you’d appreciate a heads-up if they’re not comfortable with something you’re doing or the way you’re doing it. However, it’s in your best interests to state as well that if anyone doesn’t feel comfortable speaking with you directly for whatever reason, they’re welcome to go directly to your immediate superior, the department head, or to HR. Make sure that everyone on your team is aware of this practice and expectation: otherwise, employees may reason that “going outside the family” (i.e., outside the immediate department or chain of command) could get them fired.

Note: Retaliation is an exceptionally serious charge. In the litigation arena, it has the potential to drive punitive damage awards. You NEVER want a retaliation claim charged against you. Therefore, make sure everyone on your team is aware and is reminded (publicly) that they may escalate matters concerning you or your leadership style directly to upper management at any time.

5.    Pressure to Manipulate Data

Scenario: A manager is asked to adjust financial reports to make the company’s performance look better to investors. While changing a number might not be outright illegal in and of itself, it’s certainly unethical. Note as well that it strictly violates the Sarbanes Oxley Act’s (SOX) requirements regarding accounting controls and financial reporting in publicly traded corporations. To make that real for you, consider this: Your company’s CFO who either knew or should have known about incorrect financial data in published reports shared with the investing public (for example, via quarterly 10Q or annual 10K reports) could face penalties of up to $1 million and/or imprisonment for up to ten years for something known as “defective certification.” In cases of willful noncompliance or fraud, those penalties escalate to up to $5 million and imprisonment for up to twenty years. See how quickly the “unethical” can turn into the “unlawful” with such devastating consequences?

Solution: Transparency is key. Managers should push back against dishonest practices and advocate for accurate reporting, even if it means facing pressure from higher-ups.

In all cases, take the matter directly to your superior. If that doesn’t work, escalate the matter to corporate legal, HR, the CEO, or the board of directors.

When it comes to reporting potential financial fraud, you benefit from a flexible reporting chain where, by definition, you’re permitted and encouraged to escalate matters beyond your department. Yes, you may face termination in a retaliatory backlash, but you won’t sacrifice your CPA license. You can always find another job, and you can realistically bring wrongful termination, whistleblowing, and/or retaliation charges against that organization for firing you. But if you “go along to get along” and simply “follow orders” or “do what you were told,” you can damage your career and lose your professional licensure in one fell swoop.

6.    Unethical Leadership from Senior Management

Scenario: A senior executive engages in unethical behavior, such as bullying employees or misusing company funds. The manager must decide whether to report it or stay silent to protect their own position.

Solution: Organizations should have clear reporting channels for unethical leadership. Managers must prioritize integrity over personal gain and encourage a culture where ethical concerns can be raised without fear of retaliation.

Remember as well that as a member of management, you are held to a high standard of disclosure and review. You cannot act like the monkey who sees, hears, and says nothing (i.e., the legal concepts of “deliberate ignorance” or “willful blindness”). Once one member of management is placed on notice of a problem that they knew or should have known about, then the entire organization is deemed to be placed on notice in the eyes of the law.

7.    Discrimination and Harassment

Scenario: A manager notices that certain employees are being treated unfairly due to their race, gender, or other factors. While there may be no explicit legal violation, the workplace culture is toxic.

Solution: Managers should actively promote diversity, inclusion, and belonging, ensuring fair treatment for all employees. Implementing bias training and enforcing anti-discrimination policies can help create a more ethical workplace.

Don’t fool yourself into believing that since there is so much fierce resistance to “DEI” (Diversity, Equity, and Inclusion) initiatives coming from Washington, D.C., you no longer have to worry about discrimination, harassment, or retaliation lawsuits. They remain alive and well in courtrooms all over the United States. The current political climate aside, simply ensure that members of your team can do their best work every day with peace of mind and feel like they belong and are welcome on your team—regardless of their background. That’s what the DEI movement was always all about.

8.    Balancing Performance Pressure with Ethical Standards

Scenario: A manager is expected to meet aggressive sales targets, leading to pressure to cut corners or push employees beyond reasonable limits.

Solution: Ethical leadership means setting realistic expectations and ensuring that business goals don’t come at the expense of employee wellbeing. Managers should advocate for sustainable practices that prioritize integrity over short-term gains. Be especially wary of asking hourly (nonexempt) employees to work unpaid overtime or to skip meal periods (lunch) or rest periods (breaks). Overtime is compensatory time, plain and simple, and missed meal and rest periods trigger meal and rest period penalties.

In California, for example, employers must pay one additional hour of pay for each workday where a rest break is not provided AND one additional hour of pay for each workday where a meal period is not provided (or completed without interruption). Further, while an employee can have multiple violations in a single workday, the maximum penalty for missed meal periods and rest breaks combined is two hours of pay per day.

Think of that, though. . . Two hours of penalty pay, added to an eight-hour workday, is a 25% increase in payroll. And if you think you can “just get away with it,” think again: All it takes is one dissatisfied employee or terminated associate who seeks legal advice to sue a past employer for wrongful termination or discrimination to drive a class action wage & hour claim. (That’s because plaintiffs’ attorneys ask potential clients if they ever skipped lunches or breaks or worked unauthorized overtime in order to drum up additional legal charges. If the answer is a resounding Yes, that attorney may add a class action wage & hour charge to the lawsuit.) The lookback period for unpaid overtime and/or missed meal and rest periods is four years. You can imagine how quickly unethical business practices can turn into unlawful damage awards worth millions.

Shortcomings in Managerial Ethics Drive Damages, Both Seen and Unseen

The previous examples happen more often than you think, and ethical challenges in management can take many forms. Ignoring ethical challenges can have serious consequences for both individuals and organizations. Here are some of the most significant risks:

1. Legal Repercussions

Unethical behavior often leads to violations of laws and regulations, resulting in lawsuits, fines, or even criminal charges. For example, fraudulent financial reporting can lead to regulatory penalties and legal action against the company and against the CEO and CFO in publicly traded companies under the Sarbanes Oxley Act of 2002.

2. Reputational Damage

A company’s reputation is one of its most valuable assets. Ethical misconduct—such as discrimination, corruption, or dishonesty—can severely tarnish public trust, making it difficult to attract customers, investors, and talented employees.

3. Loss of Employee Morale and Trust

When employees witness unethical behavior being ignored or tolerated, it can lead to disengagement, low morale, and increased turnover. A toxic work environment discourages productivity and innovation because employees are afraid to take “healthy” risks or otherwise make themselves vulnerable to criticism.

4. Financial Consequences

Unethical decisions can result in financial losses due to lawsuits, regulatory fines, and decreased customer loyalty. Companies that fail to uphold ethical standards may also struggle to secure investments or partnerships or otherwise integrate newly merged entities successfully.

5. Erosion of Organizational Culture and Trust

Ignoring ethical challenges can create a culture where dishonesty, favoritism, and unethical practices become normalized. Over time, this erodes the integrity of the organization and makes it difficult to implement positive change. Remember management guru Peter Drucker’s famous saying: “Culture eats strategy for breakfast.” In other words, no matter how brilliant, well-conceived, or meticulously planned a strategy may be, it will ultimately fail if the organization's culture does not support and enable its execution. Conversely, a healthy culture can enable even a less-than-perfect strategy to succeed. 

6. Increased Risk of Whistleblower Actions

Employees who witness unethical behavior may report it externally if they feel their concerns are being ignored. This can lead to public scandals, regulatory investigations, and severe consequences for leadership. Therefore, encourage your employees to speak up internally by making it easier and more comfortable for them to do so.

7.    Civil Lawsuits

Unethical behavior can result in lawsuits from employees, customers, or stakeholders. For example, discrimination, harassment, or wrongful termination charges can lead to costly legal battles and settlements.

8.    Regulatory Fines and Penalties

Government agencies impose fines on companies that violate labor laws, environmental regulations, or financial reporting standards. For instance, misleading investors through fraudulent financial statements can result in hefty penalties as outlined above under SOX as well as the incarceration of a publicly traded company’s CEO or CFO.

9.    Criminal Charges

Certain unethical actions, such as embezzlement, fraud, or insider trading, can lead to criminal prosecution. Executives and managers found guilty of financial misconduct may face imprisonment and personal liability.

10. Class-Action Lawsuits

If unethical practices affect a large group of people—such as misleading advertising, wage & hour violations, or unsafe working conditions—companies may face class-action lawsuits, leading to significant financial and reputational damage. Legal repercussions vary depending on the severity of the unethical behavior and the industry involved.

Well-Known Companies that Faced Legal Repercussions Due to Unethical Behavior and Business Practices

Just for the sake of a walk down Memory Lane, see how many of these scandals you’re familiar with. Add these to your business vocabulary, as every manager in corporate America should be familiar with their names and lessons. . .

1. Enron (2001)

Issue: Enron engaged in widespread accounting fraud, inflating profits while hiding debt. Executives manipulated financial statements to mislead investors.

Legal Consequences: The company collapsed, leading to one of the largest bankruptcies in U.S. history. (They were one of the top stocks held in retirement mutual funds.) Several executives were convicted of fraud and sentenced to prison. Its accounting firm, Arthur Anderson—at the time, the number one accounting firm in the nation—engaged in the coverup, imploded, and surrendered its CPA licenses and its right to practice before the SEC (Securities & Exchange Commission), effectively putting the 89-year-old firm out of business in 2002.

2. Volkswagen (2015)

Issue: Volkswagen admitted to using software to cheat on emissions tests, making their vehicles appear more environmentally friendly than they actually were.

Legal Consequences: The company faced billions of dollars in fines and settlements, and executives were charged with fraud.

3. Wells Fargo (2016)

Issue: Employees created millions of unauthorized customer accounts to meet aggressive sales targets, leading to widespread consumer fraud.

Legal Consequences: Wells Fargo paid hefty fines, faced lawsuits, and had to overhaul its corporate culture to regain public trust.

4. Theranos (2016)

Issue: Theranos, led by Elizabeth Holmes, falsely claimed its technology could conduct comprehensive blood tests with a single drop of blood.

Legal Consequences: Holmes and other executives faced criminal charges for fraud, and the company shut down.

These cases highlight the severe consequences of unethical business practices. But you don’t have to be a huge Fortune 500 company to suffer the consequences of unethical or fraudulent behavior. And don’t fall prey to the reasoning that “everyone engages in unethical behavior from time to time.” However you feel about what “others” are able to get away with, you and your company will still be held to the highest standards of accountability should you be sued.

Ethics is the mortar that holds your organizational structure’s bricks together. Ethics is culture, retention, discretionary effort, and loyalty. Lack of ethics can have profound negative impact on any organization’s growth trajectory, strategic goal attainment, or culture. Master the levers of ethical and moral leadership. Hold yourself accountable to the highest standards of performance and conduct. And sleep better at night, knowing how to serve as a role model in the ethics space while protecting yourself from the individual and corporate liability inherent in one of the most critical—yet undervalued—areas of career and professional development.

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If you enjoyed this blog post and want to learn more about workplace ethics and principled leadership, pick up a copy of Paul’s book, “Workplace Ethics: Mastering Ethical Leadership and Sustaining a Moral Workplace,” published by HarperCollins Leadership (2022), which you can find here:

https://www.harpercollinsleadership.com/9781400229970/workplace-ethics/ 

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