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Employment Practices

The Sarbanes-Oxley Act of 2002: Expanded Whistleblower Protection

Paul Siegel | November 1, 2002

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Paul Siegel discusses the employment-related provisions, procedures, and implications of the recently enacted "whistleblower" act, which became law July 30.

The Sarbanes-Oxley Act of 2002 was signed into law by President George W. Bush on July 30, 2002. While the Act, which is applicable only to publicly traded companies, focuses mainly on securities law reforms, it contains certain employment-related provisions and implications which are summarized below.

Expanded Whistleblower Protection

The Act significantly expands protection under federal law for employees who report certain allegations of corporate misconduct. Specifically, Section 1514A of the Act, entitled "Civil Action To Protect Against Retaliation in Fraud Cases," provides in relevant part as follows.

WHISTLEBLOWER PROTECTION FOR EMPLOYEES OF PUBLICLY TRADED COMPANIES—No company with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 781), or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o (d)), 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 in the terms and conditions of employment because of any lawful act done by the employee—

  1. to provide information, cause information to be provided, or otherwise assist in an investigation regarding any conduct which the employee reasonably believes constitutes a violation of section 1341, 1343, 1344, or 1348 1, any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders, when the information or assistance is provided to or the investigation is conducted by—
    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 (or such other person working for the employer who has the authority to investigate, discovery, or terminate misconduct); or
  2. to file, cause to be filed, testify, participate in, or otherwise assist in a proceeding filed or about to be filed (with any knowledge of the employer) relating to an alleged violation of section 1341, 1343, 1344, or 1348 2, any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders."

Accordingly, employees who engage in either of the protected activities set forth above are protected from adverse employment actions because of such activity.

Requirement To Establish Reporting Procedures

The Act requires each public company's Board of Directors' Audit Committee to establish procedures to permit employees to file confidential and anonymous internal complaints concerning "questionable accounting or auditing matters." This may require modifying policies to provide for such procedures.

Filing a Claim and Claim Processing Procedure

An employee who is subject to a prohibited adverse action in violation of the statute must file a complaint with the United States Department of Labor (the "DOL") within 90 days after the date of the alleged unlawful action. The secretary of labor will then conduct an investigation and issue an order. If the secretary finds "reasonable cause" to believe a violation occurred, the secretary will issue a preliminary order mandating relief. Either party may then appeal the order. If an order is appealed, the DOL will conduct an expeditious hearing and issue a final order within 120 days of the hearing. This final order can be appealed to the applicable U.S. Court of Appeals within 60 days of its issuance. However, if the secretary does not issue a final decision within 180 days of the filing of the complaint, and this failure is not due to any bad faith of the employee, the employee may commence an action for de novo review in U.S. District Court.

Burdens of Proof

In any proceeding, it is the employee's burden to prove that his or her protected activity was a "contributing factor" for the adverse employment action. If the employee meets this burden, an employer must then demonstrate by "clear and convincing evidence" that it would have taken the same unfavorable personnel action in the absence of the protected conduct.

Potential Remedies and Penalties

Violators of the Act are subject to both civil remedies and criminal penalties. Civil remedies include reinstatement, back pay and interest, and "special damages," such as litigation costs and attorney's fees. Neither punitive damages nor a jury trial appear to be available under the statute. Criminal penalties, including fines and imprisonment of up to 10 years, also may be issued against individuals who knowingly take any "action harmful" against a person who has provided truthful information relating to the commission (or possible commission) of a violation of the Act to a law enforcement officer. "Actions harmful" include any interference with such individual's "lawful employment or livelihood."

Miscellaneous Procedures

Employees most likely cannot waive their right to a DOL proceeding by executing a mandatory arbitration agreement. However, the language of the statute may permit waiver of federal court lawsuits in favor of DOL proceedings or arbitration. The new federal law does not preempt stronger state whistleblowing provisions. Any privately reached settlement of an administrative claim will require DOL approval.

Attorney Professional Responsibility

By August 29, 2003, the SEC will issue rules of professional responsibility for attorneys who appear and practice before the SEC. These rules are to include a provision requiring attorneys, including in-house attorneys, to report to the company's chief legal counsel or CEO evidence of both material violations of securities law and breaches of fiduciary duty. If the company's chief legal counsel or CEO does not appropriately respond, the attorney must provide such evidence to the audit committee or the company's board of directors.

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1 Refers to U.S. Code Title 18, Chapter 63, "mail fraud," specifically "Frauds and Swindlers," "Fraud by wire, radio or television," and "bank fraud."
2 Refers to U.S. Code Title 18, Chapter 63, "mail fraud," specifically "Frauds and Swindlers," "Fraud by wire, radio or television," and "bank fraud."