Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.
Recent allegations of financial misconduct by major corporations paved the way for the passage and signature on July 30, 2002, of the Sarbanes-Oxley Act of 2002, one of the most far-reaching pieces of corporate reform legislation in recent memory. Most of the debate about the Act has focused on the reform of public accounting firms and financial reporting obligations of publicly held companies. However, the Act contains provisions that received little or no public attention but which have potentially significant implications for employers.
Expanded Whistleblower Protection for Employees
Perhaps the most significant employment law change arising from the Act is the creation of a new federal cause of action entitled "Whistleblower Protection for Employees of Publicly Traded Companies." Under this section of the statute, an employee of a publicly traded company who provides information about actions that he or she reasonably believes to be a violation of federal securities law, the rules of the SEC, or "any provision of Federal law relating to fraud against shareholders" is given federal statutory protection. To warrant this protection, the employee must provide information, or cause the information to be provided, or assist in an investigation into conduct that the employee reasonably believes violates securities law or the law barring fraud against shareholders. The disclosures protected include information made available to a federal regulatory or law enforcement agency, a member of Congress, a congressional committee or, more broadly, any person with supervisory authority over the company or any person at the employer with the power to "investigate, discover or terminate misconduct." The Act also protects an employee who assists in any proceeding actually filed or "about to be filed" relating to securities fraud or fraud against shareholders. The protected assistance includes filings, testimony, participation, and assistance in such proceedings. The employee who engages in this protected activity is entitled to be exempt from discharge, demotion, suspension, harassment, or any other type of discrimination.
The far-reaching scope of the Act is emphasized by the fact that it covers not only publicly traded companies, but also their officers, employees, contractors, subcontractors, and agents. This language would appear to leave officers and employees open to liability in their individual capacities. In addition, the Act would appear to create a claim against companies or organizations which do business with publicly traded companies.
Procedures and Penalties Under the New Whistleblower Law
The procedure established by the Act for handling alleged violations is drawn from a recently enacted scheme to protect airline employees who provide air safety information. Under the Act, the employee must file a complaint with the Department of Labor (Department) within 90 days of the alleged retaliation, which is then the subject of an investigation. If the Department does not act within 180 days, and as long as the delay does not result from bad faith on the part of the employee, the employee has access to the federal district court for a determination of the claim and an application for relief. However, the initial determination is intended to be within the Department.
The statute's allocation of the burden of proof, both in departmental proceedings or in a district court filing, favors the employee. Initially, the employee must prove that the protected activity was "a contributing factor" in the unfavorable employment decision, or else the complaint will be dismissed. By implication, the Act does not place a heavy burden on the employee attempting to make out this part of the claim and the employee need not contend, or even prove, that his or her protected activity was the only reason, or even a significant reason, for the retaliation. By contrast, the employer must demonstrate "by clear and convincing evidence" that it would have taken the same unfavorable action even in the absence of the protected activity by the employee.
If the Department ultimately holds a hearing, it is required to do so expeditiously and must issue a final order within 120 days after the conclusion of the hearing. If the Department rules in the employee's favor, the employee is entitled to reinstatement, back pay with interest, and compensation for special damages sustained as a result of the retaliation, including litigation costs, expert witness fees, and reasonable attorney fees. Judicial review is available only through an appeal to the Court of Appeals, but a decision which goes against the employer is not stayed unless ordered by the court, even during the appeal.
However, if the matter is directed to the District Court because the Department has not acted in a timely manner, the employee is permitted to file suit in the appropriate district court. If successful, the employee is entitled "to all relief necessary to make the employee whole," which includes the same relief available in hearings before the Department. The statute does not by its terms provide for punitive damages or a jury trial. The new rights created by the Act do not supplant other rights that the employee may have under federal or state laws or any collective bargaining agreement. Thus, it would be possible for an employee to collect both compensatory damages under the Act and punitive damages under a state whistleblower statute.
Criminalizing Retaliation for Whistleblowing
Another significant section of the Act is the provision that anyone who intentionally retaliates against any person for providing truthful information to a law enforcement officer relating to the commission or possible commission of "any Federal offense" is subject to a fine and/or imprisonment of not more than 10 years. It is particularly important in the employment context, since the Act specifically includes "interfering with the lawful livelihood or employment of any person" as an example of prohibited conduct. This new provision arguably subjects individuals involved in termination or other adverse employment decisions related to any of the broad range of federal crimes to potential criminal liability.
Yet another section of the Act requires public companies, through their audit committees, to provide procedures for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters. Employers may be able to use existing employee hotlines to meet this requirement, but the final decision rests with the audit committee, which is given significant responsibility and independence under the Act.
Several portions of the Act impose criminal liability for the destruction of documents. One section amends the existing witness tampering statute and prohibits the destruction, alteration, or concealment of any document with the intent to impair its integrity or availability for use in an official proceeding. Such conduct is punishable by fine and/or twenty years of imprisonment. The other new section covers not only the destruction or alteration of documents, but also the falsification of documents or making any false entry. This section is not limited to documents intended for use in an official proceeding, but bars any act intended to impede, obstruct, or influence the "investigation of any matter within the jurisdiction of any department or agency of the United States or any bankruptcy case, or in relation or contemplation of any such matter or case." Again, the punishment is a fine and/or imprisonment of up to twenty years. It is certainly conceivable that this provision is broad enough to cover any document that would be relevant to any EEOC charge, wage and hour investigation or similar matters, and certainly any such proceeding in which financial whistleblowing was in any way an issue.
Pension Plan Changes
In addition to its other provisions, the Act also institutes certain new rules affecting pension plans. The Act requires thirty days' advance notice of blackout periods that would affect at least half of a public company's plan participants for more than three consecutive business days. This section is a clear effort to avoid a repeat of the situation in which Enron pension plan participants were not allowed to sell company stock in their plans even as the value of those assets plummeted. The Act provides some exceptions in unusual circumstances and the full range of the impact of the Act will be made clear by regulations that the Secretary of Labor is required to issue.
Whatever one's perception of recent developments in corporate finance, the resulting legislation contains significant changes for the human resources field. The expansion of civil and criminal liability makes it more important than ever that decision makers review sensitive employment decisions carefully with human resources directors and, where possible, with in-house or outside counsel to minimize the exposure of the company and its executive personnel.
Eric A. Savage is a shareholder in Littler Mendelson's Newark office. If you would like further information, please contact your Littler attorney at 1.888.Littler, firstname.lastname@example.org, or Mr. Savage at ESavage@littler.com.