- Impact of the Sarbanes-Oxley Act of 2002 on Employment Decisions
- May 2, 2003 | Author: Michael D. Nosler
- Law Firm: Rothgerber Johnson & Lyons LLP - Office
Are you an officer, director, or human resources manager of a public company? Are you a contractor or subcontractor to a public company? If the answer is yes, then you must become aware of the impact that the Sarbanes-Oxley Act of 2002 will have on any employment decisions you make.
On July 30, 2002, the President signed into law the Corporate Finance Reform Legislation, known as the Sarbanes-Oxley Act of 2002. This Act was designed to curb the accounting and company stock abuses that surfaced as a result of such public corporate debacles as Enron and WorldCom. The purpose of the Act was to protect investors by improving the accuracy, reporting, and accounting procedures of public corporations (companies whose securities are held publicly and cleared for secondary trading with the Securities and Exchange Commission [SEC]). However, buried within the Sarbanes-Oxley Act are several "whistle-blower" employment protections for employees who report suspected violations of the securities laws or other laws regarding fraud against shareholders. In addition, the Act amends several other statutes that provide for criminal penalties against company officials in the case of a violation.
This article will discuss who is covered by the Act, what activities are protected, the enforcement scheme, and the remedies available to a complaining party.
Who Is Governed by the Act?
The Act provides that no officer, employee, contractor, subcontractor, or agent of a public company may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of his or her employment for engaging in protected acts. Thus, it is clear that the plain language of the statute implicates personal liability for officers and managers. Moreover, contractors and subcontractors to public companies, and arguably their employees, are also covered by the Act. More important, HR managers and decision-makers must be aware of this Act to avoid personal liability.
What Activities are Protected?
The Act states that any employee who provides information or otherwise assists in an investigation that the employee reasonably believes to be a violation of the Act or any rule or regulation of the SEC or federal laws relating to fraud against shareholders is protected. Furthermore, an employee is protected against retaliation in any form for filing, testifying, or participating in any proceeding related to a violation of the securities laws.
To Whom Must the Protected Activity Be Directed?
In order to be protected by the anti-retaliation provisions of the Act, the information must be provided to:
- a "federal regulatory or law enforcement agency; or
- any member of or committee of congress; or
- a person with supervisory authority over the employee or any person working for their employer who has the authority to investigate, discover, or terminate the misconduct."
Thus, to be protected from the anti-retaliation provisions of the Act, it may be sufficient for an employee to simply report suspected misconduct to any officer, manager, HR representative, or ombudsperson within the employer organization. The employment ramifications of such reports are significant. For instance, suppose you are an HR manager of a firm who provides accounting or financial services to a public company. You find out that one of your employees has reported to her boss (the account manager) that she believes the client has engaged in improper accounting methods. You then find out that the manager has suddenly transferred her to another account without explanation in order to avoid raising problems with the client. If the employee believes the transfer was for retaliatory reasons, she may have a cause of action against her employer and her boss. Furthermore, if you approve the transfer as the HR manager, and you do not check into the real reasons for the transfer, you may be implicated as someone who has participated in the retaliation.
Thus every officer, director, and manager must be aware of the Act's protections and any system for reviewing personnel changes of employees who may be subject to the Act must have a component to ensure that the Act is not violated.
How Is the Act Enforced?
Any employee who believes he or she has been retaliated against for engaging in protected activity under the Act must file a complaint with the U.S. Department of Labor (DOL) within 90 days of the alleged retaliatory act. The employer will be notified of the complaint. If the employee has stated a case for retaliation, the Department of Labor will conduct an investigation unless the employer can show by clear and convincing evidence that it would have taken the same action against the employee notwithstanding the protected activity. In other words, if you can show the employee would have been discharged for other legitimate business reasons (i.e., absenteeism or other misconduct), then the DOL may dismiss the complaint.
If the DOL finds there is reasonable cause to believe the employee was retaliated against, it will issue a preliminary order providing appropriate relief, including reinstatement in the case of termination or revocation of a transfer in our hypothetical. Either party (the employee or employer) has 30 days to object and request a hearing, after which time the decision is final and not subject to judicial review. However, if reinstatement is ordered, the order is effective immediately and will not be stayed by objections or a request for hearing.
If an administrative hearing is requested, an administrative law judge assigned to the DOL will hear the case. This judge's order may be appealed to the administrative review board, which will issue a final order within 120 days. This final order may then be appealed to the Circuit Court of Appeals for court review. However, the standard for judicial review is very deferential to the administrative decision.
Alternatively, if the DOL has not issued a final order within 180 days of the filing of the employee's complaint, the employee may seek to file a complaint in the appropriate federal district court and obtain the remedies available under the Act.
Remedies Available Under the Act
If a violation is established, the employee is entitled to "make whole" relief. This may include reinstatement, back pay with interest, litigation costs, expert witness fees, and reasonable attorneys' fees. It is unclear at this time whether compensatory damages like emotional distress or punitive damages are available.
Criminal Penalties for Employment Decisions
One of the most onerous provisions of the Act modifies the Federal Criminal Code to impose the criminal sanctions of fines and imprisonment. The Act added to 18 U.S.C. §1513, relating to retaliation against informants, a new paragraph (e) that states as follows:
Whoever knowingly, with the intent to retaliate, takes any action harmful to any person, including interference with the lawful employment or livelihood of any person, for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any Federal offense, shall be fined under this Title or imprisoned not more than 10 years or both.
The impact of this amendment is potentially disastrous to all employers, because it is not limited to public companies. Nor is it limited to corporate reforms targeted by the Act. Thus, as if you didn't have enough to be concerned about, all officers, directors, and managers of any employing entity must be cautioned about the criminal aspects of retaliating against employees who complain that a federal law has been violated.
It is apparent that the Sarbanes-Oxley Act of 2002 has a significant impact on all future employment decisions of public companies and on those who provide services to public companies. Also, as a result of the new amendments to the criminal code, there are criminal penalties available against any employer representative who retaliates against a whistleblower.