March 27, 2003

New Protections for Employees, Responsibilities for Employers Under Sarbanes-Oxley Whistleblower Provisions

Holland & Knight Newsletter
William B. deMeza Jr.

Every company, and probably every division of every company, has “troublemakers,” those nit-picky, often obnoxious employees who dedicate their lives to finding faults—everyone’s faults.  Although such persons and their behaviors can be intensely frustrating and infuriating, many are protected by laws written to ensure that companies do not retaliate against employees who legitimately register complaints about their employers’ suspected violations of law.  In other words, in addition to any violations that might have given rise to the employees’ complaints, an employer commits a separate violation of the law by punishing or retaliating against the “whistleblowers.” 

Employers’ whistleblower problems have worsened in recent months with the enactment of the “Public Company Accounting Reform and Investor Protection Act of 2002,” commonly referred to as the “Sarbanes-Oxley Act” or “Sarbanes-Oxley.”  It mandates radical changes in corporate governance and financial reporting, and requires many companies (including publicly traded companies) to set up a method for employees to make anonymous complaints about certain securities, financial and other practices. The law makes whistleblower retaliation by employers a criminal offense punishable by prison time and fines.  Thus, it now is even more important for companies to respond carefully to employees’ complaints.

This article addresses whistleblower problems largely in the context of the Sarbanes-Oxley, requirements for public companies.  However, it is important to remember that other whistleblower laws apply to private employers (including non-public companies) and that the Securities and Exchange Commission (SEC) and other regulatory agencies still are writing regulations implementing Sarbanes-Oxley (so it is difficult to provide precise guidance about many aspects of that law).

Sources of Whistleblower Protection

Whistleblowers are protected by a variety of federal and state statutes.  Some are substantive laws that mandate or prohibit certain activities (such as air or water pollution), but also prohibit discrimination against employees who complain about or assist in investigations of the employer’s violations of these laws.  Most employers have heard of whistleblower protection in the context of “retaliation” prohibited by discrimination, family and medical leave or minimum wage/overtime laws, but whistleblowers also are protected from retaliation by environmental, health and safety, government contracting, medical reimbursement, public transportation and similar statutes.  Some states, including Florida, have free-standing whistleblower statutes forbidding adverse action against employees who complain about suspected violations of law in addition to the non-retaliation provisions in statutes relating to workers’ compensation, employment discrimination, jury service, etc.

Most whistleblower statutes describe protected whistleblower activity in very sweeping terms, protecting not only persons who complain of illegal activity but also those who participate in any resulting investigation of it.  One section of Sarbanes-Oxley is particularly broad and vague, protecting employees who provide “to a law enforcement officer any truthful information relating to the commission or possible commission of any [f]ederal offense.”  Whistleblower statutes typically do not require that a whistleblower’s complaint be correct  to be protected; for example, one section of Sarbanes-Oxley states that a whistleblower is protected from retaliation if he “reasonably believes” that the company has violated certain federal laws, whether or not any violation actually occurred.

The penalties for whistleblower retaliation vary by statute.  For example, retaliation against persons who complain of employment discrimination is often remedied by restoration of employment, lost pay/benefits, compensatory damages, punitive damages, attorneys’ fees and costs; such lawsuits have become increasingly popular in recent years, as workers’ lawyers have discovered their appeal to juries.  Sarbanes-Oxley provides that whistleblowers subjected to  retaliation are entitled to the usual “make whole” remedies, but the law also provides that persons who knowingly retaliate against whistleblowers may be fined and imprisoned up to 10 years.  Further, Sarbanes-Oxley is notable in that it establishes a protocol for whistleblowers to complain of retaliation to the United States Department of Labor which, if it finds after a preliminary investigation that there is reasonable cause to believe the retaliation claim has merit, can require the immediate reinstatement (with back pay and damages) of a discharged whistleblower.

Whistleblower Policy

Pre-Sarbanes-Oxley whistleblower litigation frequently seemed to arise from workplaces in which there was not a clear and enforced policy prohibiting retaliation against employees who complain about  suspected violations of law.  Now, Sarbanes-Oxley requires the audit committees of public companies’ boards of directors to establish procedures for receiving certain whistleblower complaints.  No previous federal law mandated such procedures. Thus, the Sarbanes-Oxley requirement actually may help many employers by requiring them to develop, implement and enforce a non-retaliation policy.

Sarbanes-Oxley does not mandate the specific content of a whistleblower policy.  (However, since the SEC continues to propose regulations implementing Sarbanes-Oxley, including regulations addressing corporate codes of conduct, the contents of whistleblower policies may be mandated in the future.)  Nonetheless, the likely content of such a policy may be inferred from the statute and from employers’ prior experiences with “complaint,” grievance and alternative dispute resolution policies. 

A “no retaliation” policy must be written in clear, simple language, informing employees that the company will not tolerate harassment, retaliation or any type of discrimination or adverse action against an employee who makes a good-faith complaint about suspected company violations of law.  The policy should identify the persons (by job title rather than by name if personnel changes are likely) who are to receive complaints of whistleblower retaliation. To ensure that whistleblowers are not deterred by gender, status, or unavailability of one individual, the list of persons who are to receive such complaints should include men and women in a variety of levels of management across various departments. The policy should state that complaints of alleged retaliation will be promptly addressed and, to the extent permitted by law and consistent with an effective investigation, be kept confidential.  

An employer cannot simply announce that it has enacted a “whistleblower retaliation” policy.  The policy must be disseminated to employees (i.e., added to the employee handbook and given to employees at the time of hire and, perhaps, annually thereafter).  The policy should be the subject of supervisor training to ensure that supervisors realize the significance of the policy, the consequences of whistleblower retaliation, and so that the company can use its training program as evidence of its good faith in any whistleblower litigation. 

Companies with “no retaliation” policies should consider postponing any modifications to them until all Sarbanes-Oxley regulations are finalized by the SEC and other regulatory bodies.  The new regulations may well require that a “no retaliation” policy be correlated with (or make reference to) other Sarbanes-Oxley-required measures (such as a code of conduct). 

Investigation of Whistleblower Complaints

Whistleblower complaints must be addressed in a consistent, thoughtful, rapid manner.  Although some complaints may be quickly resolved because they involve undisputed facts or clearly inconsequential matters (e.g., personality conflicts, not possible violations of law), others will require careful investigation. There typically are five strategic steps in such investigations.

First, the company must select an investigator or investigative team.  The best individuals are those who are personable and methodical, who have excellent interviewing and listening skills and who have received training in investigative techniques.  Although an investigator should have knowledge of the company’s policies, practices and “culture,” it is not always necessary to have knowledge of the subject matter of the complaint or of the whistleblower’s department. Frequently there is value to having a relative “stranger,” obviously with no self-interest in the outcome, conduct an investigation. 

Second, the investigator should review pertinent documents (including any written complaints of retaliation, applicable company policies and records, etc.).  The nature and number of documents to be reviewed will be dictated by the complaint of retaliation.

Third, the investigator should interview the whistleblower and likely fact witnesses.  The content of the interviews largely will be determined by the nature of the complaint being investigated, but generally should include (a) a reminder that retaliation against persons for participating in the interviews is strictly prohibited and must be reported, (b) a statement that the identity of the informants and the confidentiality of their information will be maintained to the extent possible but cannot be guaranteed (e.g., others being interviewed may deduce who has been interviewed and what was said; certain information may have to be given to the company’s legal department and, perhaps, to the government), and (c) an assurance that the witness will not be subject to discrimination or retaliation for participating in the investigation.  The interviewer should use open-ended questions; a question as simple as “is there anything more I should know?” often gets surprising and useful answers.  Interviews should not be audio-taped without the prior express consent of all persons present during the interviews (and their consents should be repeated, on the audio, after taping commences).

Most investigators take notes.  It is critical that such papers be kept in special files, separate and apart from other company documents (including personnel files); obviously, the investigative materials must be locked-up to avoid employee snooping and tampering. 

It is important to carefully consider the creation and retention of documents used during investigations because such papers may have to be furnished to an investigating agency or may become “evidence” if there is litigation.  It is important to decide, early in the investigation, whether the company will attempt to protect the investigative files from future disclosure.  Certain legal “privileges” may allow the company to refuse to produce those papers under certain circumstances, but “privileges” are technical concepts requiring the advice of legal counsel.  Similarly, legal counsel should be consulted about the destruction of records to avoid future claims of obstruction of justice. 

Fourth, many investigations conclude with the preparation of a report summarizing the investigator’s findings and, possibly, recommendations.  However, the company should consider—before investigations begin—whether it is necessary or useful to prepare a written summary that may have to be disclosed to outsiders.  If a report is prepared, it should identify the persons and the documents reviewed and contain an assessment of the evidence.  Reports must not contain speculations about what might have occurred, comments about the alleged wrongdoer’s propensities or generalized characterizations of events.  Further, it is important to avoid making legal conclusions, e.g., it is better to say “John acted in an inappropriate manner” than “John sexually harassed his co-worker in violation of various federal and state laws.”  It is best simply to identify John’s behavior. “John said…, and then made the following gesture…”

Finally, the company must act on what the investigator has found and, if it appears that there has been discrimination against the whistleblower, the wrongdoers should be disciplined consistent with the severity of their misconduct.  Irrespective of the investigation’s outcome, the whistleblower should be told, in general terms (to avoid revealing confidential information), about the investigation and its outcome. 

Common Whistleblower Problems

A currently employed whistleblower may be a real problem for the employer because proof of “whistleblower” retaliation necessarily is based on the sequence of events: the whistleblowing occurred and then the employee suffered adverse employment action.  Thus, once the whistle has been blown, the company must be able to demonstrate that any future adverse action against the whistleblower, including changes in pay, benefits, status, primary job duties, shift, etc., are justified by evidence that the whistleblower is being treated just as similarly situated employees who did not made complaints.

Whistleblowers sometimes are reluctant to pursue a retaliation complaint; it is not uncommon for human resources personnel who have been told about suspected retaliation also to hear “I don’t want anything done about it.”  Such requests generally should be ignored: the whistleblower must be told that the complaint has put the company on notice of a potential problem and that any failure to investigate it could have legal consequences, that is, it might later be argued that the company ignored or approved of the retaliation by failing to investigate it.   

Conclusion

The Sarbanes-Oxley Act will force many employers to adopt “no retaliation” policies.  Although such policies may be helpful in minimizing retaliation litigation if they are carefully drafted, they also are likely to generate retaliation complaints that will have to be carefully investigated.

Future issues of this newsletter will report on Sarbanes-Oxley developments.

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