EMPLOYMENT LAW
What Employers Need to Know About Sarbanes-Oxley — Employee Whistleblower Protections
October
2003
By Anne
G. Scheer*
for New Hampshire Business Review
On July 30, 2002, Congress passed
and President Bush signed into law the Sarbanes-Oxley Act of
2002. While the bulk of this law addresses accounting and auditing
requirements, it also includes
enhanced protections for employees who report corporate fraud
and adds criminal penalties for retaliation taken
against whistleblowers providing truthful information
to a law enforcement officer relating to the commission or possible
commission of "any federal offense."
Criminal Liability
Dozens of federal and state laws protect employees from retaliation
by employers for disclosure of illegal activities to government
regulators or law enforcement. However, Sarbanes-Oxley is unique in
that, in addition
to imposing civil liability for negative employment action taken
against an employee for such reporting, this law makes it a federal
crime for
anyone to "knowingly, with the intent to retaliate, take any action
harmful to any person, including interference with the lawful
employment or livelihood of any person, for providing to law enforcement
any truthful
information relating to the commission or possible commission
of any federal offense." It should be noted that this crime is
not limited to retaliation for disclosures related to securities
fraud, but rather
provides criminal liability for taking retaliatory action against
any person for providing truthful information to law enforcement
relating to the commission of any federal offense.
In addition, although
most of the provisions of Sarbanes-Oxley apply
only to United States domestic publicly-traded corporations,
non-public companies whose debt instruments are publicly
traded and foreign companies
registered to do business in the United States, this
criminal penalty extends to privately held corporations. Individual
persons
found guilty
of this crime can be fined up to $250,000 and imprisoned
for up to 10 years. Corporate defendants face fines of up to $500,000.
Civil
Liability
Unlike criminal liability for retaliation under this Act, the civil
liability provisions for retaliation do not apply to strictly private
corporations but rather apply only to United States publicly-traded
corporations, all non-public companies whose debt instruments are publicly
traded and all foreign companies registered to do business in the United
States. The civil liability whistleblower provisions of this Act establish
liability when: any officer, employee, contractor, subcontractor or
agent of any such company takes any negative employment action in retaliation
for the employee providing information, otherwise assisting in an investigation
or testifying, participating or otherwise assisting in any proceeding
regarding conduct that the employee reasonably believes constitutes
a violation of any rule or regulation of the SEC, any federal law related
to corporate fraud or any federal law relating to mail fraud, bank
fraud or fraud by wire, radio or television, if such information or
assistance is provided to any federal regulatory or law enforcement
agency, any member of Congress or congressional committee or any
person with supervisory authority over the employee.
Again, while dozens of federal and state laws protect employees from
retaliation for disclosure to governmental authorities of illegal practices,
this law is very broad in that it also protects disclosure to any person
with supervisory authority over the employee.
An employee alleging retaliation under this law must file a complaint
with the United States Department of Labor ("DOL") within
90 days of the alleged retaliation. Within 60 days of the filing of
a complaint, the DOL is authorized to conduct an investigation to determine
whether there is reasonable cause to believe that the complaint has
merit. If the DOL does not conduct an investigation and issues a decision
within 180 days from the date the complaint is filed, the complainant
can file their claim in federal court.
To prevail under this law, the complainant only needs to show that
the protected activity was a contributing factor in whatever negative
employment action was taken. Once again, this aspect is unlike many
other whistleblower laws which generally require that the whistleblower
prove that their reporting was the cause, or at least was a significant
or motivating factor in the negative employment action taken. To rebut
the claim this law requires that the employer show by clear
and convincing evidence that the employee's report had no
effect on the personnel
action taken.
An employee prevailing in a civil whistleblower action under Sarbanes-Oxley
is entitled to "all relief necessary to make the employee whole." This
includes reinstatement with the same seniority status, back pay with
interest and compensation for any special damages including litigation
costs, expert witness fees and reasonable attorneys' fees. Moreover,
the rights afforded an employee under this law are not exclusive. An
employee bringing an action under this law retains the right to bring
all other causes of action available.
What's a Company To Do?
First and foremost, this law requires all United States publicly-traded
corporations, all non-public companies whose debt instruments are publicly
traded and all foreign companies registered to do business in the United
States to have an audit committee which, among other things, is charged
with establishing procedures for:
- receipt, retention and treatment of complaints received . .
. regarding accounting, internal accounting controls
or auditing matters;
and
- confidential, anonymous submission by employees . . . of concerns
regarding questionable accounting or auditing matters.
In most instances, especially with the potential for criminal penalties,
it is recommended that a very limited number of individuals be authorized
to receive these complaints. Authorizing multiple individuals to receive
complaints is likely to increase the potential for the complaint to
be ignored or not shared high enough in the company for the correct
action to be taken. It also is likely to greatly increase the number
of individuals informed of the claim. And, regardless of the initial
procedures established to intake claims, this law requires that all
allegations of fraud and retaliation ultimately be reviewed by the
company's mandated audit committee and, as set forth above, a record
keeping system must be in place to keep track of every incoming complaint
and its disposition.
Obviously, once a complaint is received, it is essential that a thorough
internal investigation is conducted. An investigation is critical for
two reasons. First, not doing an investigation is likely to push the
whistleblower outside the company into the arms of government investigators
increasing the likelihood of civil and criminal actions being filed.
Second, even if the whistleblower does go outside, if a thorough internal
investigation was conducted and appropriate action taken, any civil
or criminal penalties are likely to be lighter if wrongdoing is subsequently
found.
Employer’s should review their current written employment
policies to ensure that adequate complaint policies and procedures are in place.
These policies must include information on reporting and redress of
complaints and should clearly state that retaliation against any employee
who provides truthful information with respect to corporate fraud or
the commission of any federal offense will not be tolerated. It is
also critical that employers train their management employees with
respect to their responsibilities under Sarbanes-Oxley.
Lastly, given that an employer will only prevail in defending a civil
whistleblower complaint brought under this Act if it can prove by clear
and convincing evidence that the same unfavorable employment action
would have been taken in the absence of the whistleblowing, it is absolutely
essential that supervisors properly document employee misconduct
at the time it occurs, and this documentation should be reviewed before
any unfavorable employment action is taken. While it is never easy
to defend an adverse employment action that is taken close in time
to a protected activity, whether the protected activity is an OSHA
report, an ADA complaint, or FMLA leave, given that an employer under
this Act must prove by clear and convincing evidence that the adverse
employment action taken had no relationship to the protected conduct,
it will be essential for the employer to be able to show the employee's
misconduct.
Remember, it is often only after negative employment action is taken
that the employer learns the identity of the individual that made a
report to OHSA or another governmental agency. Given the high burden
of proof this law imposes on employers, it is more critical than ever
that incidents of employee misconduct that could later be the basis
for negative employment action be documented and acted upon at the
time the misconduct occurs.
*Anne G. Scheer is admitted to practice in New Hampshire.
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