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How to make employees comfortable reporting misconduct internally and protect them from retaliation.
The U.S. Securities and Exchange Commission (SEC) last fall awarded $14 million to an anonymous whistle-blower, the largest such award so far in that agency’s 3-year-old program aimed at fighting financial fraud.
The biggest whistle-blower award to date went to former UBS banker Bradley Birkenfeld, who collected $104 million from the Internal Revenue Service in 2012 for providing information about how the Swiss bank helped Americans avoid taxes.
Such eye-popping sums have drawn attention to whistle-blowing in ways that no government PR campaign ever could. Financial rewards are being used increasingly by federal and state lawmakers to entice employees to provide inside information that will help investigators ferret out fraud.
Congress has passed a dozen new whistle-blower protection statutes in recent years, while 20 new state laws have been adopted. And recent U.S. Supreme Court decisions have broadened the scope of whistle-blower protections already on the books.
“I think we’ve really seen a seismic shift in this area and a true escalation of exposure and concern,” says attorney Gregory Keating, co-chair of the whistle-blowing and retaliation practice at Littler Mendelson who represents employers. For employers, “to stay put and do nothing is not a very good option right now.”
To minimize the risk of expensive government investigations or lawsuits, HR professionals should strengthen internal reporting systems and training on nonretaliation policies. They also can encourage positive relationships with employees so workers feel comfortable reporting issues internally.
“We don’t want to deal with litigation over something that could have been taken care of from the onset,” says David Twitchell, PHR, vice president of HR for New Hampshire Catholic Charities in Manchester, N.H.
“You want people to trust the organization and feel integrity in the organization and feel very safe and comfortable,” Twitchell says. “Ultimately, that’s going to protect their morale and their ability to produce as well.”
For decades, the federal government has used the False Claims Act to fight fraud among government contractors. The U.S. Justice Department recovered $3.8 billion—$2.9 billion with the help of whistle-blowers—from civil cases in federal fiscal year 2013, which ended Sept. 30. For their help, whistle-blowers were rewarded $345 million. Whistle-blower lawsuits increased from 433 in 2009 to 752 in 2013.
Building on that success, the SEC three years ago implemented a similar reward system for those blowing the whistle on securities violations in publicly traded companies. The SEC offers whistle-blowers up to 30 percent of any amount above $1 million that the government recovers.
The reward system created by the Dodd-Frank Act was a game-changer because whistle-blowers “are no longer just shielded from retaliation. They are given a sword … a way to collect a piece of the action,” Keating says.
But whistle-blower advocate Stephen M. Kohn, executive director of the National Whistleblowers Center, registers some impatience with the slow pace of SEC awards so far. In addition to the record $14 million award, the SEC paid three other whistle-blowers a total of $800,000 last year. Wall Street companies won’t change the way they operate until the SEC whistle-blower awards are large enough and occur on a sufficiently frequent basis to capture their attention, Kohn says.
“It has not seeped into the culture yet that there’s a new regime, and the way it will sink in is through the mechanism that Wall Street understands—the bottom line. They understand money,” Kohn says.
More cases are in the pipeline, says Keating, who predicts that the number of awards will grow. The SEC received 3,238 tips in fiscal year 2013, an 8 percent increase from the previous year.
Meanwhile, in March 2014, the Supreme Court dramatically increased the number of companies that could be sued for retaliating against those who blow the whistle on securities fraud. The court concluded that whistle-blower protections in the Sarbanes-Oxley Act, passed in 2002 in response to the Enron financial scandal, apply not only to employees of some 4,500 publicly traded companies but also to those employed by millions of private companies that do business with them.
The high court’s ruling in Lawson v. FMR means that many small and medium-sized businesses will be forced to develop internal reporting systems and anti-retaliation policies similar to those required of publicly traded companies—or risk expensive lawsuits, says Keating, who argued against the expanded interpretation in a friend-of-the-court brief filed on behalf of the Society for Human Resource Management.
But Kohn says the justices’ 6-3 decision closed “a potentially devastating loophole in corporate whistle-blowing protection.” He can’t understand why business groups argued against the inclusion of contractors hired by publicly traded companies. “Why promote behaviors that caused the Enron collapse, that caused the mortgage collapse?” he asks. Companies need to “embrace a culture of disclosure and not view the whistle-blower as the enemy,” he says.
The SEC also is pushing to expand protections for whistle-blowers who report suspected wrongdoing to their employer before turning to an outside agency, which business groups oppose. The SEC has made its argument in a friend-of-the-court brief in Liu v. Siemens, which is pending in the 2nd U.S. Circuit Court of Appeals. If that court agrees with the SEC, it would create a split in the appeals courts that could send the issue to the Supreme Court.
Continuing the corporate crackdown, SEC whistle-blower chief Sean McKessy also warned corporate lawyers earlier this year against offering incentives for employees to report internally, which could be construed as an effort to block them from going to the SEC.
Overall, there are about 49 federal laws protecting the rights of corporate workers to report wrongdoing, including the rights of those in specific industries such as health care, food, airlines and mass transit. Most of the laws offer fired workers only reinstatement and back pay; only four offer financial rewards.
Most states also have whistle-blower protections. California beefed up its own this year, says Anthony J. Oncidi, who heads the Labor & Employment Law Group in the Los Angeles office of law firm Proskauer Rose. Now, employees are protected if they report wrongdoing internally, even if the employer believes the worker may disclose such information in the future, Oncidi says.
California also has extended its safeguards to workers reporting alleged violations of local laws, rules or regulations—instead of only federal or state laws.
Most people are reluctant to get involved when they see something suspicious at work.
Among those who observed misconduct last year, only 63 percent reported what they saw, according to the Ethics Resource Center’s 2013 National Business Ethics Survey, which polled 6,420 employees. When employees did choose to report misconduct, 92 percent turned first to someone inside their organization, usually their direct supervisor. Just 9 percent reported problems to a government agency.
When they reported to an outside agency, only 14 percent said they were motivated by possible monetary rewards, the survey results revealed.
“Most are true believers of the systems for which they work,” Kohn says. “They are not the cynics.”
The financial rewards give them a cushion, which helps them to endure the ordeal to come. In exploring their options, “They want to know ‘Is it worth it?’ It doesn’t mean they are greedy. But they’re pragmatic. They want to know the risks,” Kohn says. “Even those who took the jump, almost none of them understand how hard the fall is.”
Many are harassed, fired or blacklisted in their industry for reporting wrongdoing, Kohn says. Some suffer depression and anxiety and can’t return to their chosen profession.
An employee is most likely to blow the whistle if he or she observes the same misconduct repeatedly and views the employer as immoral, says Joyce Rothschild, a sociology professor at Virginia Tech who interviewed more than 400 whistle-blowers in the mid-1990s.
Ironically, employees aren’t labeled as “whistle-blowers” until the company decides to retaliate against them, Rothschild notes. When an employee reports misconduct to a supervisor who immediately corrects the problem, “they are just a person who has an observation to share,” she says.
The best companies see these employees as an asset, an early-warning system. “Be open to criticism, feedback and change,” Rothschild says. Instead of seeking to discredit the employees, consider what you can learn from them.
A case in point: In a third of the companies hit by fraud last year, whistle-blowers sounded the alarm, according to a global survey of 901 senior executives conducted by risk management company Kroll. Inside tips played a role in 42 percent of the cases of fraud involving senior or middle managers, which might otherwise go undetected.
Revenge Can Be Costly
Despite the increasing legal protections, retaliation rates remain high, according to the National Business Ethics Survey. Twenty-one percent of U.S. workers who reported misconduct said they experienced retaliation, up from 12 percent in 2007. That’s equivalent to about 6.2 million Americans.
Retaliation charges are the most common claims filed with the U.S. Equal Employment Opportunity Commission, making up 41 percent of all charges.
In leadership training, “I’ve made clear that issues of retaliation are worse than the issue itself,” says Twitchell, who held hospital HR positions before taking his recent job with New Hampshire Catholic Charities.
That’s because, even when employees are unsuccessful in their original discrimination claim, they can still win a claim that the company retaliated against them for filing the complaint, explains Allison West, SPHR, a Pacifica, Calif., lawyer who provides legal and HR training to employers.
Retaliation claims became easier to prove in court after a 2006 Supreme Court decision broadened the type of employment actions that may be considered retaliation.
West calls retaliation lawsuits “the high cost of getting even.” Angry managers who are accused of wrongdoing may need to be reminded not to make the situation worse by excluding the worker from meetings, denying him or her raises, or worse.
Create a Process
HR professionals can help keep their organizations out of legal trouble by creating an ethical culture where employees are comfortable reporting wrongdoing internally and by protecting them after they do so. To do that, they should develop a fair and consistent process for employees to make reports and for how reports will be investigated.
“The best defense is a strong offense in this area,” Keating says. When employers have to write large settlement checks, it’s usually because they didn’t have a process in place for handling employee complaints, he says.
He and other lawyers advise HR professionals to:
HR professionals also should ensure that investigations are completed in a timely manner. The time it took organizations to close their investigations increased from 30 days in 2008 to 36 in 2013, according to Navex Global’s 2014 Ethics and Compliance Hotline Benchmark Report, which reflects responses from 8,000 of the company’s clients. If employees think the organization is ignoring their complaints, they’ll take them elsewhere, warns Carrie Penman, Navex Global’s chief compliance officer.
Don’t tune out those who managers label as “chronic complainers,” she advises. The Navex Global research found that reports from repeat hotline users are being substantiated at a rate of 40 percent—4 percent higher than the 36 percent substantiation rate for first-timers.
Waste Management, which has 43,000 employees in the U.S. and Canada, has had a comprehensive internal reporting system for employees for more than a decade. The Houston-based company, which was named to the Ethisphere Institute’s 2014 list of “world’s most ethical companies,” has a higher rate of reports than most other organizations do.
“Honestly, at first, I’m not sure we understood if that was a good or a bad thing,” says Rob Kviklys, HR vice president for field operations in Alpharetta, Ga. “We quickly realized that’s a good thing” because it enabled them to identify more issues.
About 4 percent of its employees call the helpline each year, generating about 1,700 calls annually.
Employees undergo yearly training on the company’s ethics policy, which includes how to report misconduct. They are encouraged to report concerns to their immediate supervisor or directly to HR professionals in the field. In addition to the anonymous helpline, the company has a generic e-mail address that employees can use. Some even take a pen to paper.
Once a year, the company sends a business ethics questionnaire to a targeted group, including those in management, procurement, finance, HR, legal, security and others that vary from year to year, says Stella Raymaker, director of ethics and EEO compliance. One question it asks: “Do you know of anybody who has violated the laws, regulations and company policies regarding the environment?”
In addition, Raymaker sends out quarterly updates on trends in employee reports, which could indicate areas where more training is needed. “If there is a spike in activity in a certain area, I’m usually aware of that from the HR team,” Kviklys says. But the trends report is another way to ensure that the HR team isn’t missing something. HR or other teams investigate all reports and follow up with employees.
“People trust they are going to get an answer and are confident that there is going to be no retaliation for what they are doing,” Kviklys says. “Without trust, I’m not sure the best system, the best process or the best communication in the world is going to get you a lot of information.”
Communication Is Key
At Hannibal Regional Healthcare System in Hannibal, Mo., Ann Dunham, SPHR, says her first priority when she began as compliance director last year was to make the organization’s 900 employees more aware of the reporting system.
“I do rounds every two to three weeks to different departments, and I talk with employees to make sure they know how to find the hotline, how to go up the chain of command if they don’t think things are being taken care of and then, if they feel retaliated against, to know they can come to me and HR and we will hold those people accountable,” says Dunham, who held both HR and compliance roles in her last hospital job.
In the heavily regulated health care field, “we need the employees to be the eyes and ears” of the organization. “I’m trying to let people know that the big reason we need them to tell me is that we could get in big trouble down the road,” she says.
She also asks departing employees during exit interviews if they witnessed any compliance violations while working there or have any compliance concerns.
By having clear policies in place and enforcing them, and by training managers to not retaliate, HR professionals not only will minimize the risk of lawsuits for their organizations but also will create a better working environment, says Edwin G. Foulke, a partner with law firm Fisher & Phillips and a former head of the U.S. Occupational Safety and Health Administration.
Use the procedures as a positive management tool, he says. “In the long run,” he explains, “it’s going to help you be more profitable and be more competitive in your business if you have these things in place.”
Dori Meinert is a senior writer for HR Magazine.
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