Volume 39, Issue 6, June 2004
Taking On Employers
Whistleblower Claims Emerge as a Threat
by David Barron
When most people hear the word “whistleblower,” they conjure up media images of tobacco company executives or, perhaps, Enron. Popular culture has glorified whistleblowers to the point that employees now feel emboldened to take on their employer, and seek their own 15 minutes of fame. Consider that the average employer operates under hundreds of laws, and is regulated by at least five federal agencies. How damaging would it be to have one of your employees turn against you—and then claim protected status under new federal laws protecting whistleblowers? Even more disturbing, the fight might not come from the shop floor, but instead from one of your executives, managers or even human resources personnel. Now imagine that you are not Phillip Morris or Enron, but instead are a small- or medium-sized business without a legal department or a sizable legal budget. That is the situation facing thousands of employers after the passage of the recent Sarbanes Oxley Act.
The Sarbanes Oxley Act
The act was passed in 2002 in response to a wave of corporate accounting scandals that shook the nation’s financial markets. Congress implemented new, tougher standards on financial reporting. More importantly, Congress enacted sweeping protections for employees who report misconduct internally or to an appropriate law enforcement or regulatory agency. Such persons are commonly referred to as whistleblowers.
The most extensive whistleblower protections were implemented for publicly traded companies. Employees of such companies are protected from retaliation for reporting a wide category of legal violations, primarily relating to financial misconduct, fraud and securities violations. The definition of a publicly traded company, however, is incredibly broad. Employers traded on the NYSE or Nasdaq are not the only ones included. If the company registers its stock under section 12 of the Securities and Exchange Act or files financial reports under section 15(d) of the same act, the employer is covered. In essence, small companies with limited shareholders can still be covered under Sarbanes Oxley.
Further, all companies (both public and private) are covered by Sarbanes Oxley’s criminal provisions. Those sweeping provisions protect employees from retaliation if they provide truthful information to a law enforcement officer concerning a federal offense. Due to the newness of the law, there is not yet a clear definition of who exactly a law enforcement officer is, and what matters will constitute a federal offense. A conservative reading of this law would mean that an employee who reports a violation to any federal agency, such as OSHA, DOL or EPA, would qualify for protection. Retaliation against that employee would then constitute a federal crime punishable by a fine or as much as ten years in prison or both. Managers and executives could also be held liable individually as criminal defendants.
Impact on Small and Medium Employers
The award for the first adverse Sarbanes Oxley decision goes to a small bank in rural Virginia that is as far from Wall Street as you can get. The case was brought by David Welch, the chief financial officer of Cardinal Bankshares, a holding company for several small town banks in the Blue Ridge Mountains. On most days, not a single share changed hands. The bank’s audit committee consisted of three farmers, a local dentist and a school official.
Welch brought several accounting irregularities to the attention of the bank’s president that he claimed were not addressed. When asked to certify the company’s financial reports, Welch refused and was terminated for insubordination. Welch filed a claim with the Department of Labor, but it was dismissed. He appealed the decision and won a trial before a federal administrative law judge assigned to the case. The judge ordered that Welch be reinstated and awarded back pay and other expenses against the bank. In disbelief, the bank’s lawyer was quoted in the local newspaper as saying that the law “was never intended to protect employees from a dispute with management” and that it was “intended to root out corruption in big companies that employ a lot of people.”
The above decision is not an aberration. The cases filed under Sarbanes Oxley have been a mixed assortment of claims against companies ranging from the Fortune 500 to small employers such as Cardinal Bankshares. Moreover, many state courts have passed new whistleblower legislation, or expanded existing laws, in the wake of recent events.
Preventing and Responding to Whistleblower Claims
Whistleblower actions are so serious because there is the potential for dual liability. First, the company must address whatever allegation of misconduct or illegality is raised. Depending on the seriousness of the charge, the company may have to prepare a strategy to deal with the media, law enforcement or regulatory agencies, as well as internal morale. This is no easy task. At the same time, the company is legally required to remain neutral and not retaliate against the employee who raised the charges. This simply goes against human nature. A recent survey by a professor at Virginia Tech concluded that 69 percent of employees who reported wrongdoing internally were terminated, and the number rose to 80 percent if the report was made to outside authorities.
So what stirs employees to take these types of risks? There are two predominant whistleblower types: the “true believer” and the person who is “looking out for number one.” The latter is the type who goes along with something he knows is wrong until the point where it looks like there may be trouble. That person only points the finger in the hope of avoiding blame.
The true believer is more difficult for a company to handle. This person passionately believes he is right and the company is wrong. This person may be hard to reason with, and if not satisfied internally will not hesitate to go to the media or to law enforcement.
Dealing with both types of whistleblowers requires that procedures be in place to catch issues early, before they spiral out of control. Some suggested steps include:
• Communicate to employees the relevant laws and rules applicable to their jobs—require employees to sign off that they understand what they can and cannot do;
• Encourage internal reporting. Develop an effective system that maintains confidentiality, to the extent possible, and protects employees against retaliation;
• Implement effective policies and training for supervisors who are often on the front lines in dealing with whistleblower complaints; and
• To the extent possible, involve legal counsel in investigations of complaints to preserve the attorney client privilege.
All companies, large and small, must pay attention to this emerging area of litigation. Whether under Sarbanes Oxley, or a similar state law, whistleblower complaints are tough to defend and can be costly in both legal fees and bad publicity. Spending the time up front to prepare a game plan and to train management on how to respond can mean the difference between a successful defense and a costly legal fight against one of your own.
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