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Sarbanes-Oxley May Lead To More Worker Retaliation Claims

Last year, Congress enacted the Sarbanes-Oxley Act as a comprehensive measure designed to address a perceived lack of confidence in the country’s public companies in the wake of the Enron fiasco.

The act is broad in scope. In addition to wide-reaching accounting and corporate governance provisions, it contains new reporting duties, a much-publicized requirement that CEOs and CFOs certify financial statements, and rules directed toward attorney representation of public companies.

One relatively over-looked section of the act creates new civil and criminal whistleblower protections for employees of public companies. Employers need to be aware of the potential liability for retaliating against whistleblowers who come forward with complaints of financial irregularities.

Unlawful Conduct Under The Act

The act prohibits public companies and their officers, employees, contractors, subcontractors or other agents from discharging, demoting, suspending, threatening, harassing or in any other manner discriminating in the terms and conditions of employment with respect to employees who:

  • provide information or assist in an investigation regarding any conduct the employee reasonably believes constitutes a violation of the securities laws when the information is provided to a federal regulatory or law enforcement agency, Congress or any supervisor of the employee; or

  • file, testify, participate or otherwise assist in proceedings (including private actions) alleging violations of the securities law, SEC regulations or any provision of federal law relating to fraud against shareholders.

The act protects a whistleblower even if his report of an SEC violation is incorrect, provided the employee “reasonably believed” that the reported activity constituted a violation.

Employees are protected for assistance or testimony they provide not only in connection with government enforcement proceedings, but for civil proceedings as well.

Thus, an employee who provides testimony or information to plaintiffs in a class action securities lawsuit would find protection in the act.

Who Is Potentially Liable?

The act primarily seeks to impose liability on public companies and their
officers and employees. Individuals are subject to liability in their personal capacities —
as a result, a company’s human resources director could face personal exposure for “threatening” or “harassing” an employee who accuses the company of impropriety.

The act also reaches any “contractor, subcontractor or agent” of a public company. This means that private companies doing business with public companies (and perhaps even the individual officers or principals of the private companies) could face liability under the act.

Procedure For Resolving Complaints By Whistleblowers

Under the Act, aggrieved employees must file a complaint with the Department of Labor within 90 days of the alleged retaliation. Cases under the act’s whistleblower provisions are investigated by the Occupational Safety and Health Administration (OSHA), an agency that has heretofore investigated whistleblower claims only with respect to health, safety or environmental concerns.

The employee is required to make a prima facie case by demonstrating that the protected activity was a contributing factor in the adverse employment decision. The defending company can rebut the prima facie case by putting forward clear and convincing evidence that the adverse decision would have been made even absent the protected activity.

Upon completing its investigation, OSHA will make a determination whether the employee has been subject to retaliation. If OSHA finds that the employee has been subject to retaliation, it will order the employee reinstated immediately.

If OSHA does not issue a final determination within 180 days of the filing of the complaint, the employee may file suit in the U.S. District Court and obtain de novo review.

Either party may appeal OSHA’s investigative determination. Appeals are convened before the DOL’s administrative law judges. Parties are entitled to an expeditious hearing on the record and the ALJ must issue a final order within 120 days of the conclusion of the hearing.

Civil Remedies Available Under The Act

The act provides that any prevailing employee shall be entitled to all relief necessary to be made whole.

Specifically, if a finding of retaliation is made, the employee shall receive reinstatement with all seniority and other terms, conditions and privileges associated with his former position; 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.

The DOL is also obliged by the statute to order the defendant to “take affirmative action to abate the violation.” There is no allowance for punitive damages.

The Act expressly preserves other sources of whistleblower protection under state or federal law.

Criminal Provisions In The Act?

In addition to the civil remedies, the act also provides criminal penalties for anyone who knowingly and intentionally retaliates against any person for providing truthful information about the commission or possible commission of any federal offense.

The criminal provision is narrow in the sense that it only applies if information is given by the whistleblower to a law enforcement officer, but broad in that it encompasses information concerning any offense, not just those relating to securities violations or fraud.

A criminal violator may be punished by fines and up to 10 years in prison.

Conclusion

The act’s whistleblower provisions come at a time when employment lawyers sense an increased trend in retaliation claims in general. Public company employers need to take affirmative steps to review their employment policies and practices to minimize the risk of a retaliation claim under the act.

Companies should educate personnel about the key provisions of the act and ensure that a vital, open, internal complaint procedure is in place.

With personal civil and criminal liability looming, corporate officers and managers should sit up and take notice.

[A version of this article first appeared in the May 19, 2003 issue of Massachusetts Lawyers Weekly.]

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