Whistleblower Regulations and the Forge
Recent events in federal government news have included at least one whistleblower action, giving rise to the question of what whistleblower regulations are in place regarding your business.
To review, whistleblowers are employees who expose fraud, waste or other misconduct occurring within their company. Retaliation against whistleblowers is nothing new, but legislative policies to protect whistleblowers from being fired, harassed or otherwise abused in the workplace are comparatively new. In March 2014, the U.S. Supreme Court ruled in Lawson v. FMR LLC and opened a new chapter in small-business regulatory compliance. The Sarbanes-Oxley Act of 2002 (SOA) provided whistleblower protections for employees after reporting fraudulent financial practices, particularly in public companies.
The Lawson decision expanded the scope of regulated companies from about 5,000 public companies to potentially 6 million private companies, including the smallest operations. As a result, employers of every size and type have to prepare themselves for potential SOA whistleblower claims, sometimes only because they are a contractor or subcontractor of a publicly traded company.
Consequently, the Lawson decision could pose significant costs and undue burdens on small-business owners and could lead to litigation that will force small and mid-size companies to learn unfamiliar securities laws. Now more than ever, affected contractors and subcontractors should have substantial policies in place for addressing whistleblower complaints.
Small businesses that now find themselves governed by whistleblower regulations must learn to be reasonable with employees who report suspected wrongdoing. Instead of firing them or taking other retaliatory action, employers are now required to rally around the whistleblower and offer to help them file their complaint.
Some legal experts suggest businesses would be wise to enact robust whistleblower policies. Such policies should:
- Safeguard the whistleblower’s anonymity to the extent possible
- Encourage whistleblowers to exercise discretion without discouraging them from reporting misconduct
- Address the preservation of evidence relating to the accused fraud
- Establish procedures for the conduct of internal investigations
The whistleblower portion of the SOA entitles employees who prevail on their claims to a full “make whole” remedy, which includes reinstatement and can include back pay and benefits, “front pay” for lost wages going forward, and compensatory damages for emotional pain and suffering.
When an employer retaliates against a whistleblower, three elements are necessary for an SOA claim against the employer to succeed:
- The employee must be engaged in protected activity as defined by the law at the time of the retaliatory action.
- The employee is protected if the employer took adverse employment action against the employee.
- The adverse employment action against the employee was caused at least in part by the protected activity.
For private businesses that are now expected to comply with SOA laws, objectivity is the key to success. This is not an easy mindset to embrace, but serious consequences exist if objectivity is found lacking or ignored, including steep fines, prosecution and even prison time for both business owners and employees.
Since SOA is one of many laws that includes anti-retaliation statutes, it is noteworthy that an employee can sue over retaliatory events whether or not their claim is investigated. Case law is ever-changing, and much of the legal landscape is still up for interpretation. With so much risk and uncertainty, a clear whistleblower policy is the recommended step for employers looking to defend themselves.
In order to limit whistleblower complaint risk, companies should illustrate their commitment to ethical behavior and encourage employees and stakeholders to report questionable activity. For the small-business owner committed to compliance, whistleblower hotlines and anonymous reporting tools are clear reminders to staff that they can report perceived wrongdoing without fear. In addition, it is important to make sure that all employees understand the appropriate steps to take when reporting suspected illicit behavior.
Now that some private companies must meet compliance standards set by the SOA ruling in Lawson, many employers are brushing up on whistleblower law, learning what is needed to meet compliance regulations and retaining adequate legal advice.