Now that some private companies are faced with meeting compliance standards set by the recent Supreme Court Sarbanes-Oxley (SOX) ruling protecting whistleblowers from employer retaliation, many employers are brushing up on whistleblower law, learning what is needed to meet compliance regulations, and retaining legal advice.  

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.

A New Chapter in Whistleblower Regulatory Compliance

The March 2014 ruling opens a new chapter in small business regulatory compliance. The reality of a federal investigation can be disastrous to smaller firms, and still compliance rules are the same here as they are for public companies who have had to comply since 2002.

The decision expanded the “universe of companies” regulated by the SOX whistleblower provision from about 5,000 public companies to potentially six million private companies, including the smallest mom-and-pop, according to Lloyd Chinn of the whistleblowing and retaliation group of law firm Proskauer.

“Employers of every size and type will have to prepare themselves for potential Sarbanes-Oxley whistleblower claims, merely because they are a contractor or subcontractor of a publicly traded company,” says Chinn.

The Cost to Small Businesses

Gregory Keating, co-chair of the whistleblowing and retaliation practice law firm Littler Mendelson, says the decision could pose enormous costs and undue burdens on small business owners, “and could lead to an avalanche of litigation that will force small and mid-size companies with limited resources to learn unfamiliar securities laws.”

One thing is certain. Now more than ever affected contractors and subcontractors must be sure to have substantial policies in place for addressing whistleblower complaints.

Dealing with Whistleblower Complaints

Small businesses that now find themselves governed by whistleblower regulations must learn to be reasonable with employees who report suspected wrongdoing for the first time. Instead of firing them or taking other retaliatory action, employers are now required to rally around the whistleblower and offer whatever it takes to help them file their complaint.

Legal experts suggest robust whistleblower policies be enacted. At a minimum, such policies should:

  1. Safeguard whistleblower’s anonymity to the extent possible
  2. Encourage whistleblowers to exercise discretion without discouraging them from reporting misconduct
  3. Address the preservation of evidence relating to putative fraud
  4. Establish procedures for the conduct of internal investigations into suspected fraud

Whistleblower Rights and Responsibilities Under Sarbanes-Oxley

The whistleblower portion of the Sarbanes-Oxley Act 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. Employees who prevail in such proceedings may also recover their litigation costs, including attorneys’ fees.

When an employer retaliates against a whistleblower, there are three elements necessary for a SOX claim against the employer to succeed:

  1. The employee must be engaged in protected activity at the time of the retaliatory action. Protected activity is activity protected under whistleblower laws.
  2. The employee is protected if the employer took adverse employment action against the employee, and
  3. The adverse employment action against the employee was caused at least in part by the protected activity.

(Source: Katz, Marshall & Banks)

Policies, Objectivity Key in Complex Legal Landscape

For private businesses that find that they are now expected to comply with Sarbanes-Oxley laws, objectivity is the key to success with compliance.

This is not always an easy mindset to embrace, but serious consequences exist if objectivity is found lacking or ignored in compliance reporting, including steep fines, prosecution and even prison time for both business owners and employees.

Since Sarbanes-Oxley is one of many laws that includes anti-retaliation statutes, it’s important to note 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, being proactive and establishing a clear whistleblower policy is the recommended step for employers looking to defend themselves.

Proactively Addressing Whistleblower Reports

To limit the risk of a whistleblower lawsuit, 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, and that you are willing to help make sure that their voices are heard.

It’s important to make sure that all employees understand the appropriate steps to take when reporting suspected illicit behavior. When they believe you’re taking the ethical route, they will follow.

Legal Disclaimer

This article is for informational purposes only and not for the purpose of providing legal advice. You should contact legal counsel to obtain advice with respect to legal obligations under Sarbanes-Oxley or other statutes.