- DOL Finds Sarbanes-Oxley’s Whistleblower Protections Applicable to Employees of Contractors
- July 14, 2012 | Authors: Richard J. Cino; Joseph C. Toris
- Law Firm: Jackson Lewis LLP - Morristown Office
Employees of contractors of publicly-traded companies are protected by the Sarbanes-Oxley Act’s whistleblower provision, regardless of whether the contractors themselves are publicly traded, the Department of Labor’s Administrative Review Board has held. Spinner v. David Landau & Associates, LLC, ARB Nos. 10-111, 10-115 (May 31, 2012).The ARB declined to follow a contrary result reached by the U.S. Court of Appeals for the First Circuit in Lawson v. FMR, LLC. This case signals the ARB’s broad interpretation of SOX whistleblower protections to encompass non-public companies that contract services to public companies.
Whistleblower Protection for Employees of Publicly-Traded Companies
Section 806 of the Act provides that “[n]o company with a class of securities registered under section 12 of the Securities Exchange Act of 1934, or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934, or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee...for engaging in protected activity.” 18 U.S.C. § 1514A (a).
The Act, however, does not define “employee,” thus, leaving the term open to interpretation by both the courts and the Department of Labor, which have dual jurisdiction to adjudicate cases under the Act.
First Circuit’s Decision in Lawson
In Lawson, the First Circuit held that only employees of publicly-traded companies enjoy SOX whistleblower protection. The plaintiffs worked for private companies that provided services under contract to publicly-held mutual funds. While the district court denied the employer’s motions to dismiss, holding that SOX’s whistleblower protections reached employees of private agents, contractors and subcontractors in private companies, the appeals court granted interlocutory review and ultimately reversed the district court decision. (For more information on Lawson, please see our article, SOX Whistleblower Protection Does Not Extend to Employees of Privately Held, Contractor Organizations.)
ARB Decision in Spinner
In Spinner, the plaintiff, a Certified Public Accountant (CPA), alleged he was fired from his position at DLA, an internal audit firm, for reporting internal control and reconciliation problems at a publicly-traded client of DLA.
Spinner timely filed a complaint with the Occupational Safety and Health Administration. OSHA concluded after an investigation that DLA would have terminated the employee even if he had not reported the problem. Spinner appealed the case to an administrative law judge (“ALJ”), who ruled in favor of DLA in June 2010. The ALJ held that DLA and its employees were not covered by SOX’s whistleblower provision because DLA was not a publicly-traded company.
On appeal, however, the ARB found the holding in Lawson to be non-controlling and declined to follow it. Relying on its reading and the implementing regulations, the ARB ruled SOX covers employees, such as Spinner, who are employed by contractors for publicly-traded companies.
According to DOL regulations implementing Section 806 of SOX, an “employee” is “an individual presently or formerly working for a company or company representative ... or an individual whose employment could be affected by a company or company representative.” Further, according to DOL regulations, a “company representative” can be “any officer, employee, contractor, subcontractor, or agent of a company.” The ARB emphasized the lack of an explicit limitation on Section 806 protections under SOX. The ARB posited that if Congress intended such a limitation, it would have sought to define "employee" or in some other way made any intended limitation clear.
The ARB also found SOX’s legislative history did not suggest Section 806 should be limited to employees of public companies. In fact, it concluded the legislative history actually points to broad, rather than limited, coverage. Section 806 was enacted as a response to the Enron scandal, in which outside contractors, such as accounting firms and law firms, were implicated. Therefore, the ARB found Congress intended SOX to protect outside professionals, who are most likely to uncover fraudulent activity, from retaliation.
The ARB has long interpreted analogous whistleblower statutes delegated to DOL enforcement (such as the Energy Reorganization Act, the Pipeline Safety Improvement Act of 2002, and the Wendell H. Ford Aviation Investment and Reform Act for the 21st Century) to cover employees of contractors and subcontractors. Accordingly, the ARB concluded Section 806 should be interpreted consistently with those statutes and its coverage should extend to employees of outside contractors.
The ARB observed Section 806 contains built-in restrictions to limit coverage, specifically that employees have a reasonable belief of violations of specific anti-fraud laws or Securities and Exchange Commission regulations and the requirement that the protected activity be a causal factor in the alleged retaliation.
The ARB’s decision in Spinner sets the stage for a potential surge in claims against contractors. It also represents what appears to be a growing divide in the interpretation of SOX between the DOL and the federal courts. For example, the ARB held in another case that the pleading standard established by courts for SOX whistleblower complaints (that they “definitively and specifically relate” to an area protected by the statute) was inappropriate, ruling instead that any “reasonable belief” the complained-of activity could fit within SOX is sufficient. Further, while SOX complainants can seek a trial de novo in the federal courts if the DOL does not reach a final decision on their claims within 180 days, more complainants may choose to keep cases before the DOL as the DOL’s decisions seem more employee-friendly.