In the fast-paced world of business, many employers cannot react fast enough when faced with a whistle-blower who is working inside their own company. With a multitude of federal statutes plus state statutes that prohibit whistle-blower retaliation, many employers are left scratching their heads as they attempt to avoid getting trapped in a legal battle while continuing to run their businesses.
It is important for an employer to understand what to do, or not do, if an employee has blown the whistle.
Triggering SOX Protection
The whistle-blower protections of SOX (SOX) prohibit publicly traded corporations from taking any adverse employment action against an employee that has blown the whistle on the company (18 U.S.C. § 1514A(a)). SOX protections are triggered when an employee internally reports or externally discloses conduct he or she reasonably believes constitutes a violation of mail, wire, bank or securities fraud, as well as any rule or regulation of the Securities and Exchange Commission (SEC) and any provision of federal law relating to fraud against shareholders (hereinafter "SOX violations"). SOX protection extends even to an employee’s reasonable but mistaken belief that an employer engaged in conduct that constitutes a violation. For SOX protection to apply, however, an employee's belief must be reasonably objective (see Livingston v. Wyeth Inc., 520 F.3d 344 (4th Cir. 2008)).
Objectively Reasonable Belief
The 1st Circuit recently issued a decision interpreting what constitutes an "objectively reasonable belief" under SOX (see Day v. Staples Inc., 2009 WL 294804 (1st Cir.)). In denying the plaintiff's claim, the 1st Circuit held that the plaintiff's belief that his employer's internal business practices constituted fraud against its shareholders was not objectively reasonable because the practices he complained of were not in any way material to shareholders.
In order for the plaintiff's belief to have been objectively reasonable, he must have believed there was a "likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available." In this case, the plaintiff's complaints dealt with purely internal practices that were not financial in nature and were not reported to shareholders so they did not meet the materiality requirement for an objectively reasonable belief in shareholder fraud.
Furthermore, in 2008 the 4th Circuit concluded that a former employee had "no objectively reasonable basis" to believe his former employer had violated or was in the process of violating U.S. securities law when the alleged violation had not yet occurred (Livingston, 520 F.3d 344, 352).
Types of Covered Whistle-blowing
SOX covers two types of whistle-blowing. An employee is protected if he or she either:
- Provides information, causes information to be provided, or otherwise assists in an investigation regarding any conduct which the employee reasonably believes constitutes a SOX violation when the information or assistance is provided to or the investigation is conducted by a federal regulatory or law enforcement agency, any member of Congress or any committee of Congress or a person with supervisory authority over the employee (or such other person working for the employer who has the authority to investigate, discover or terminate misconduct).
- Files, causes to be filed, testifies, participates in or otherwise assists in a proceeding filed or about to be filed, relating to an alleged SOX violation.
Protections for Reporting Problem Internally
An employee is protected from retaliation after providing information to a person with supervisory authority over the employee regarding any conduct which the employee reasonably believes constitutes a SOX violation. In other words, if an employee reports an alleged violation to the human resources department, to a manager or, possibly, to another employee, the employee is protected as long as the other employee has the authority to investigate or discover the reported conduct. Under such circumstances, the employer may not discharge, demote, suspend, threaten, harass or in any other manner discriminate against an employee in the terms and conditions of employment, nor may any officer, employee, contractor, subcontractor or agent of the employer.
Employer Response to Employee Who Reports Problem Internally
If an employee reports internally, the company should:
- Take the complaint seriously.
- Complete a full and fair investigation of the complaint.
- Ensure that the company’s internal processes will result in the complaint reaching the highest levels of management (i.e., the president or the board of directors).
- Follow-up with the employee if he or she self-identified.
- Resolve the issue.
- Disclose the issue externally if necessary.
- Not retaliate, even if a claim does not have merit.
Protections for Reporting Problem Externally
An employee is protected from retaliation after providing information to a federal regulatory or law enforcement agency or member or committee of Congress. An employee also is protected if he or she participates in a legal proceeding. Under such circumstances, the employer may not discharge, demote, suspend, threaten, harass or in any other manner discriminate against an employee in the terms and conditions of employment, nor may any officer, employee, contractor, subcontractor or agent of the employer.
Employer Response to Employee Who Reports Problem Externally
If an employee reports externally, the company should:
- Fully cooperate with the government in its investigation.
- Self-disclose pertinent information.
- Take remedial action.
- Not retaliate.
Retaliation Prohibited
Retaliation includes discharge, demotion, suspension, threats, harassment or any other manner of discrimination against an employee in the terms and conditions of employment, whether such action is undertaken by the employer or any officer, employee, contractor, subcontractor or agent of the employer. Not only does this cover a broad range of activities (e.g., a reduction in job duties unaccompanied by a reduction in pay can constitute retaliation under SOX); but it also means that employers are responsible for the actions of their other employees against the whistle-blower.
Retaliation victims are entitled to reinstatement, back pay with interest and compensation for any special damages sustained as a result of the discrimination, including litigation costs, expert witness fees and reasonable attorneys’ fees. Plaintiffs can seek punitive damages under most state whistle-blower statutes.
Unlike other federal anti-discrimination laws, SOX permits individuals, as well as the employer, to be liable for retaliation.
There are also criminal penalties for retaliation. Anyone who, "with the intent to retaliate, [conspires to, or] takes any action harmful to any person, including interference with the lawful employment or livelihood of any person," because that person provided truthful information relating to the commission or possible commision of any federal offense to a law enforcement officer may be subject to fines and imprisonment up to 10 years.
SOX Relief
SOX whistle-blower retaliation claims are delegated to the Department of Labor’s Occupational Safety and Health Administration (OSHA). Within 90 days of the alleged violation (i.e., when the discriminatory decision has been both made and communicated to the complainant), victims must file a written complaint with OSHA. OSHA will then review the complaint and make a determination on whether to conduct an investigation.
If the evidence supports the employee's allegation, but a settlement cannot be reached, OSHA will issue an order requiring the employer, where appropriate, to reinstate the employee, pay back wages, restore benefits, provide other relief to make the employee whole, and pay special damages. OSHA’s findings become the final order of the Secretary of Labor, unless appealed within 30 days.
After OSHA issues its findings and order, either party may request a full hearing before an administrative law judge of the DOL. The administrative law judge’s decision may be appealed to the department’s Administrative Review Board. If the DOL has not issued a final decision within 180 days of the filing of the complaint, the complainant may file suit in federal district court. Proceedings will be de novo.
SOX provides protection for both internal and external whistle-blowing. There is no requirement that an employee utilize internal measures before looking externally. To avoid such outside reporting, employers should implement procedures that promote open dialogue with employees.
SOX’s Application
SOX protects the employees of publicly traded companies. Specifically, companies with a class of securities under Section 12 of the Securities Exchange Act of 1934 are subject to SOX's whistle-blowing provisions.
SOX applies to employees who work outside the United States if the retaliation has a substantial nexus to the United States. In 2008, a federal district court held that a foreign citizen working abroad for a United States subsidiary of a foreign company listed on the New York Stock Exchange was protected by the whistle-blowing provisions of SOX (O'Mahony v. Accenture Ltd., 537 F. Supp.2d 506 (S.D.N.Y. 2008)). In that case, the court found that it had jurisdiction to hear the case because the plaintiff alleged that the United States subsidiary perpetrated the alleged fraud in the United States and that the retaliation against her was undertaken by executives located in the United States.
Other Whistle-blower Protections
A majority of states have tort causes of action for retaliatory discharge that are exceptions to the "at-will" doctrine. Unlike SOX, these claims explicitly allow aggrieved employees the right to a jury trial and to collect punitive damages. In addition, most states have recognized a cause of action for a discharge against public policy in which an employee claims that he or she was fired in violation of a right that is conferred upon the employee by clear mandate of public policy.
SOX Claims Subject to Arbitration
The 2nd Circuit has held that SOX retaliation claims may be subject to mandatory employment arbitration agreements (Guyden v. Aetna, 544 F.3d 376 (2d Cir. 2008)).
Compliance Program Needed
The crux of SOX is corporate governance, although the act is not explicit in how it should be attained. A compliance process can help ensure that defined, uniform procedures are strictly followed with every accounting, internal accounting control or auditing matter, and that each employee complaint will be handled in compliance with SOX. In addition, a well-defined compliance process encourages employees to use internal complaint processes before acting externally. Furthermore, the Federal Sentencing Guidelines mitigate an employer’s criminal liability if it has internal mechanisms set up to deal with whistle-blower complaints.
Because SOX protects even an employee’s reasonable belief that fraud is being committed, employers should develop educational programs to train and inform officers, directors, managers and all employees on what constitutes a valid SOX violation and how to use the compliance process to ensure a proper response. Managers must be trained to keep detailed records of employee performance, so that an employee who is terminated for valid reasons cannot falsely claim protection under SOX.
Robert D. Rose and Karin Hunter Johnson are attorneys with Sheppard Mullin. Rose is in the firm's San Diego office and leads Sheppard Mullin's White Collar and Civil Fraud Defense Practice Group. He specializes in white collar criminal defense and all varieties of civil fraud litigation in the state and federal courts. Johnson is in the firm's Washington, D.C., office, and routinely counsels employers on various labor and employment issues.
Related Resource:
SOX Toolkit