Labor Law

WHISTLEBLOWER PROVISIONS OF SARBANES-OXLEY: WHAT HR AND EMPLOYMENT COUNSEL MUST KNOW

Last summer Congress passed the Sarbanes-Oxley Act, aimed at preventing the type of accounting and corporate governance abuses and management self-dealing alleged in the ENRON, Arthur Andersen, and Adelphia debacles. "Covered companies" under the Act are corporations that are publicly held, whether U.S. or foreign, if the non-U.S. public company is registered with the Securities and Exchange Commission ("SEC").

Sarbanes-Oxley addresses many matters that employment counsel and HR management will probably not be directly involved in or primarily responsible for, such as the make-up of the board of directors' audit committee; developing a code of ethics for senior financial officers; CEO and CFO certifications of financial statements; internal controls regarding audits; enforcement provisions, including bonus forfeitures for CEOs and CFOs; creation of a five-member board to oversee the accounting industry; and as to attorneys who appear before the SEC, reporting evidence of violations of securities laws, breaches of fiduciary duty or similar violations.

Whistleblower Provisions

Section 806 (18 U.S.C. 1514A) prohibits retaliation by employers against "whistleblowers," i.e., employees of covered companies who claim they were retaliated against because they provided information or participated in a proceeding addressing alleged violations of federal securities or antifraud laws, such as the mail fraud statutes. This provision applies not only to SEC-registered companies, but to their officers, employees, contractors, subcontractors and agents. Thus, businesses that are not registered with the SEC may be brought in through the "back door" and the statute may provide liability for individual executives and managers.

The no-retaliation protection is available, however, only if the employee provides information, causes information to be provided, or otherwise assists in an investigation regarding conduct that the employee reasonably believes is a violation of mail/wire fraud, bank fraud or securities fraud laws. (Many states have laws protecting whistleblowers. Sarbanes-Oxley does not prevent the application of other whistleblower laws, but instead provides protection in addition to those laws.)

However, whistleblowing is not a generalized matter. Specifically, the information must be provided to, or the investigation must be conducted by:

A federal regulatory or law enforcement agency;

A member of Congress or any committee of Congress; or

A person with supervisory authority over the employee (or such other person working for the employer who has the authority to investigate, discover or terminate misconduct).

Also protected is an employee's filing, causing to be filed, testifying, participating in or otherwise assisting in a proceeding filed, or (if the employer knows about it) about to be filed regarding any SEC rule or regulation or any federal law relating to fraud against shareholders.

Procedural Matters

Complaints must be lodged with the Secretary of Labor within 90 days of the alleged retaliatory conduct. The Secretary investigates and, within 180 days, issues a decision that is final, subject only to review by the Circuit Courts of Appeal under an abuse of discretion standard. However, if the Secretary does not issue a decision within 180 days, and the delay is not caused by the employee's bad faith, the employee may file suit in U.S. District Court, which will decide the matter de novo.

Remedies

Sarbanes-Oxley's remedies are not entirely clear. On the one hand, reinstatement, back pay and special damages such as attorney fees, litigation costs and expert witness fees are expressly allowed, and punitive damages are expressly excluded. On the other hand, the Act recites that remedies should include "all relief necessary to make the employee whole." Arguably, this could include damages for pain/suffering/emotional distress/humiliation/ and the like, and front pay in lieu of reinstatement.

Criminal Provisions

Section 1107 of Sarbanes-Oxley (18 U.S.C. 1513) provides criminal penalties of fines and/or imprisonment for up to ten years for anyone who, intending 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..." Note that this provision is not limited to "covered companies." It applies to everyone. There is no ambiguity here as to whether there is individual liability for violations, as this is obviously addressed to individuals as well as to corporations. However, there is great ambiguity about the meaning of "law enforcement officer" e.g., does it include EEOC intake personnel?and equal ambiguity about the meaning of "any Federal offense."

Employers must be prepared for complaints that every alleged EEO, wage-hour, NLRA or OSHA "retaliation" has potential criminal implications for companies and managers.

Practical Considerations

All employers affected by this statute should immediately review their internal complaint procedures. Most companies already have in place detailed policies dealing with sexual and other forms of harassment that undoubtedly include provisions for reporting perceived policy violations, for investigating complaints and for preventing retaliation. And some companies have wisely extended these policies to discrimination in general. However, few, if any, have in place similarly detailed policies for whistleblowers. While individual corporate cultures will determine whether such policies will be expanded narrowly, to assure protection only of behavior covered by the Sarbanes-Oxley Act, or broadly, to protect whistleblowing generally, some modification of policy will be essential to almost all employers. Along with the obvious (and immediate) impact of Sarbanes-Oxley on personnel policies, covered employers should be aware of (and may well want to coordinate their HR efforts with) Section 301 of the statute (18 U.S.C. 78f) requiring the...