- The Implications of the Sarbanes-Oxley Act On Employers
- August 13, 2003
- Law Firms: Womble Carlyle Sandridge & Rice, PLLC - Raleigh Office ; Womble Carlyle Sandridge & Rice, PLLC - Winston-Salem Office
As a result of Enron's attempted retaliation against Sherron Watkins for blowing the whistle on the company and as an effort to restore investor and public confidence in the corporate world, Congress passed the Sarbanes-Oxley Act in July, 2002 (the "Act"). The Act attempts to provide corporate reform by imposing new accounting requirements, and enhancing penalties for violations of securities laws for public companies registered under Section 12 of the Securities and Exchange Act of 1934. One of the most significant provisions of the Act provides federal protection for "whistleblowers". The Act requires that covered companies encourage employees to come forward with information regarding potential corporate fraud, and specifically prohibits employers from retaliating against employees who provide such information.
An employee is protected under the Act if he reports a violation of any:
(1) federal securities law;
(2) rule or regulation of the Security Exchange Commission; or
(3) provision of federal law protecting fraud against shareholders.
The employee need not prove that the employer actually violated the law, but must have a "reasonable belief" that his employer engaged in unlawful activity. The employee may report the activity to: (1) a federal regulatory or law enforcement agency, (2) any member of Congress or any committee of Congress, or (3) a person with supervisory authority over the employee. An employee is also protected if he provides information in an investigation conducted by any of these three entities. In addition, protected activity includes filing, causing to be filed, testifying, participating in, or otherwise assisting in a proceeding filed or about to be filed relating to an alleged violation of securities law, the rules and regulations of the Securities Exchange Commission, or any law protecting shareholders.
Unlike many other federal whistleblower statutes, the Sarbanes Oxley Act prohibits a broader class of individuals from retaliating against employees, and includes a much broader definition of retaliation. First, the Act prohibits not only covered companies from retaliating, but also prohibits officers, employees, contractors, subcontractors or any other agents of such company from retaliating against an employee who reports potential corporate fraud. Thus, these individuals may be personally liable for retaliation. Second, the Act specifically prohibits a wider range of retaliation than other statutes with retaliation provisions. Under the Act, retaliation includes discharge, demotion, suspension, threats, and harassment. In addition, the statute has a "catch all provision" which provides that retaliation includes "any other discrimination in the terms and conditions of employment because of any protected activity engaged in by the employee."
Filing a Complaint
If an employee believes he has been the victim of retaliation for reporting alleged corporate fraud, he may file a complaint with the Department of Labor ("DOL"). However, the statute of limitations is very short for such claims, and requires that any such complaint be filed within 90 days of the alleged retaliatory action. In order to state a claim for retaliation under the Act, the employee must set forth evidence that he engaged in protected activity, and that such participation was "a contributing factor" to an adverse employment action. If the employee meets this burden, then the employer must prove "by clear and convincing evidence" that it would have imposed the same adverse employment action in the absence of the alleged protected activity. Within 60 days of receiving the complaint, the DOL must conduct an investigation, provide the employer with an opportunity to respond to the employee's allegations, and issue a preliminary order. Once the preliminary order is issued, the employer may file objections within 30 days and request a hearing. However, filing an objection does not operate to stay any reinstatement remedy contained in the order. If the employer does not file an objection, the preliminary order becomes a final order. After a final order is entered, the losing party may appeal the decision directly to the Court of Appeals within 60 days from the date of the decision. If the Secretary has not issued a final decision within 180 days from the date of filing the complaint, the employee may file a lawsuit in the appropriate federal district court.
Although neither punitive damages nor a jury trial are available to an employee under the Act, a successful claimant is entitled to all relief necessary to make him whole.
Such remedies include:
(1) reinstatement of employment;
(2) back pay with interest;
(3) compensatory damages to make the whistleblower whole; and
(4) reasonable attorneys' fees and costs.
In addition, the Act provides for significant criminal penalties against anyone who knowingly retaliates against an employee engaging in protected conduct. Any individual who "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 truthful information relating to the commission or possible commission of any federal offense" may be subject to penalties including substantial fines and/or imprisonment of up to 10 years. Thus, it appears that anyone who retaliates against an employee for reporting information regarding any federal crime, not just securities fraud, could potentially be criminally liable.
The Unanswered Questions Under The Act
Although Congress has attempted to address potential retaliation against employees for reporting corporate fraud, many questions are left unanswered, and will probably remain unanswered for many years to come.
1. Litigation Outside the DOL. Congress has placed the burden of investigating and deciding retaliation claims with the DOL within a very short timeframe. For numerous reasons, it is unlikely that the DOL can meet these deadlines. First, while the DOL currently has responsibility for investigating retaliation claims under other statutes, it has no experience with securities fraud, and will likely need guidance from other federal agencies. Second, the DOL does not have the staffing necessary to expedite the process. In March 2003, the DOL employed approximately 75 investigators, but had received over 50 complaints as of the end of that month. In addition, the Act does not provide the DOL with any incentive to issue a timely decision. If it does not issue a decision within 180 days from the filing of the complaint, the employee can simply file a lawsuit in federal court.
2. Resort to Internal Complaint Procedures. The Act provides protection for an employee who complains to his supervisor in addition to complaining to law enforcement officials. However, the Act does not provide any guidance for when an employee should report allegations of corporate fraud to his supervisor before seeking help from outsiders. If an employee reports his concerns to law enforcement officials, the employer will not have an opportunity to investigate the allegations.
3. "Reasonable Belief." An employee is protected as long as he has a "reasonable belief" that fraud has occurred. However, the Act does not define what "reasonable belief" is, nor is there any source suggested for supplying a definition of the term.
4. Alternative Dispute Resolution. Many employers have instituted programs requiring arbitration of employment disputes. These programs often require employees to engage in arbitration in lieu of filing a lawsuit. The Act does not address whether an employer can require that its employees engage in arbitration to resolve any potential whistleblower claims under the Act. Similarly, the Act specifically provides that it does not diminish the rights of any employee under a collective bargaining agreement. Thus, if a collective bargaining agreement requires arbitration for any grievance relating to an employee's employment, it is unclear whether the employee must follow this procedure before filing a complaint with the DOL.
5. "Make-whole" Remedies. The Act states that there may be an award of "all relief necessary to make the employee whole", but does not specifically provide that damages for pain and suffering, "mental anguish," or other emotional distress are available.
How Can an Employer Protect Itself From Whistleblower Complaints And/Or Lawsuit?
An employer can protect itself and its officers, directors, and managers by taking some precautions.
- Establish a reporting procedure. Employers should establish an internal complaint procedure for employees to report corporate fraud. Although most employers have procedures for reporting sexual harassment, employers should consider a separate reporting mechanism for fraud allegations to ensure that these complaints are treated with proper care. Obviously, it may be inappropriate to expect a Human Resources professional to be able to deal with a report of alleged financial wrongdoing, and the investigation may require a different set of skills. The complaint procedure should set forth how and to whom employees should report potential fraud, and provide that any complaints may be made confidentially and anonymously. Such procedures should also address how the employer will respond to any complaints, what investigation will be conducted, how long the investigation is expected to last, and how the employer will inform the employee of the results of the investigation.
- Update employee handbooks. Employers should update their handbooks to include a statement encouraging employees to bring concerns about accounting and financial practices to the attention of management, and provide information regarding the internal complaint procedure for reporting potential fraud. In addition, the employer should include a statement regarding its commitment to investigate any and all complaints thoroughly and in a timely manner. Policies should include language that no form of fraud is acceptable, and that employees are required to report violations or suspected violations immediately upon knowledge of such violations. Finally, any policy should contain a firm statement that retaliation will not be tolerated and offenders will be punished.
- Educate workforce. Employers should educate both employees and management regarding the Act and the employer's procedures for reporting corporate fraud. As the Act only protects from retaliation for securities fraud, employers should consider providing a brief overview of the types of conduct that are considered securities fraud. In addition, managers, officers, and directors should be educated on what constitutes protected activity and retaliation under the Act.
- Review existing insurance policies. Employers should review their existing policies to determine whether officers, managers, and other employees are covered for whistleblower and retaliation violation.
- Document employee performance. While employers are always encouraged to document employee performance, the Act creates an even greater incentive for employers to do so. In order to establish the employer's burden of showing that the action would have been taken absent the employee's protected conduct, employers must have the documentation to support such claim.