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New Employee Whistleblower Protections Created By The Sarbanes-Oxley Act

Abby B. Silverman, Renee S. Schor and Laurence E. Stuart from the Baker & McKenzie Employment Law Group contributed to this report.

On July 30, 2002, President Bush signed into law H.R. 3763, known as the Sarbanes-Oxley Act of 2002 (the "Act"), which provides for sweeping reforms in corporate governance and within the accounting industry. While the new corporate accountability requirements imposed by the Act have received the bulk of media attention, the Act also contains broad employee whistleblower protections which subject companies and their employees and agents to significant civil and criminal penalties for retaliating, harassing, or discriminating against employees who report suspected corporate wrongdoing. Public companies would be well advised to educate their managers, supervisors, and executives concerning these new whistleblower rules.

Who is Governed by the New Whistleblower Protections?

Companies listed on U.S. stock exchanges, companies otherwise obligated to file reports under the Securities and Exchange Act, their officers, employees, contractors, subcontractors, and agents of these companies are governed by the Act and may not "discharge, demote, suspend, threaten, harass, or in any other manner discriminate" against an employee protected by the Act.

Which Employees Are Protected?

The Act protects employees who lawfully provide information to governmental authorities concerning conduct they reasonably believe to constitute mail, wire, or securities fraud, violations of any rule or regulation issued by the Securities and Exchange Commission, or violations any other Federal law relating to fraud against shareholders. Specifically, the Act protects any employee who provides such information, causes the information to be provided, or otherwise assists in an investigation regarding such conduct. The employee is protected if the information or assistance is provided to, or the investigation is conducted by:

(a) a Federal regulatory or law enforcement agency;

(b) any member of Congress or a Congressional committee;

(c) any company employee with supervisory authority over the employee; or

(d) any company employee with authority to investigate, discover, or terminate prohibited corporate misconduct.

The Act also protects employees who file, cause to be filed, testify, participate in, or otherwise assist in a proceeding filed or about to be filed (with the knowledge of the company) alleging corporate fraud covered by the Act.

How Must Claims be Filed?

An employee who claims he or she has been discharged or otherwise discriminated against in violation of the Act must file a complaint with the Department of Labor within ninety (90) days after the date the alleged violation occurs. The Secretary of Labor will investigate the allegations and issue a decision regarding the alleged wrongdoing. In the event the Secretary of Labor fails to issue a determination within 180 days after the complaint is filed, through no fault of the employee, the employee may initiate a civil lawsuit in a United States District Court.

What Relief is Available to the Employee?

The Act provides that an employee who prevails in a whistleblower action brought under the Act is entitled to make-whole relief, which may include reinstatement, back pay, and special damages, including litigation costs, expert witness fees, and reasonable attorney fees.

What Criminal Penalties Does the Act Impose?

The Act imposes broad criminal penalties. Any person who "knowingly, with the intent to retaliate, takes any action harmful to any person . . . for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any Federal offense" is subject to a substantial fine, imprisonment for up to ten years, or a combination of both.

Practical Considerations

Companies will need to evaluate and implement internal reporting and complaint procedures to ensure compliance with the Act. Company executives, supervisors, managers, and internal audit staff should be trained regarding these new whistleblower protections to ensure they do not unknowingly create claims against themselves or the company.