On March 4, the United States Supreme Court (SCOTUS) voted to extend whistleblower protection to employees and contractors of private companies that work with publicly traded firms.

By expanding the language of the Sarbanes-Oxley Act (SOX), Justices gave many small businesses membership to a club previously reserved for privately traded companies. Under the act, companies face penalties for retaliating against employees who aid federal investigators as whistleblowers.

Intended to reform the corporate financial practices that led to accounting scandals and huge losses to investors and employees in the early 2000s, SOX was re-examined by the Supreme Court to determine if certain private companies that employ contractors and subcontractors should be held to the same compliance standards as public companies.

SCOTUS’s ruling gives private companies employing contractors and subcontractors a reason to bone up on the same internal compliance regulations that publicly traded corporations must adhere to.

(More from CMS: What is a Whistleblower?)

Origins of Sarbanes-Oxley (SOX)

SOX was originally established to crack down on financial exploitation by what were once considered high-achieving corporations: WorldCom, Enron, Waste Management, Inc., Freddie Mac and other publicly traded organizations. In part, SOX protects whistleblowers that helped federal investigators catch and prosecute the corporate thieves who cost investors billions of dollars through their criminal activities.

High on the list of prosecutable offenses are mail fraud, Ponzi schemes, false accounting practices, bank fraud, wire fraud and transportation of funds obtained by theft or fraud.

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Court Asked to Define “Employee”

To make sense of how the new SOX ruling applies only to small businesses that retaliate against whistleblowing contractors and subcontractors they employ, let’s look at the definition of “employee” as it is relates to Sarbanes-Oxley.

Language included in SOX prohibits “any officer, employee, contractor, subcontractor, or agent” of a public company from discriminating against, firing, or taking other retaliatory actions taken against an “employee” because of their role as a whistleblower.

SCOTUS was challenged with determining who is considered an “employee” and who falls under the statute’s protected class category.

Language on the ruling’s last page says the Court’s decision has widespread implications for the financial-services industry, its employees, and the corporate structures of SOX-regulated entities. The decision now opens up private employers to new civil liability via their contracts with public companies.

Employers who do business with public companies need to familiarize themselves with the regulations governing public companies and know when those regulations have been violated, as well as their rights and potential liabilities pursuant to the whistleblower protections of SOX.[ii]

More Companies Now Impacted

According the the Wall Street Journal, This ruling means that “exposure to Sarbanes-Oxley (SOX) whistleblower protection claims is now something both public companies and private companies have to assess as “any private employer who happens to be a contractor of a public company is subject to a suit.”

The court noted in its opinion that the intent of SOX is to “ward off another Enron debacle” by empowering employees to report fraud.[iii]

Ruth Bader Ginsberg, who cast the deciding vote in favor of the ruling, expressed concern that the intent of the statute to punish and deter corporate and criminal fraud “could be subverted if whistleblower protections were extended to individuals who work for a public company but not to those who work for a public company’s contractor, subcontractor, or agent,” according to the Wall Street Journal.

(More from CMS: Fraud and Ethics Hotline Service)

Concerns Over Scope of Ruling

Justice Sonia Sotomayor, who voted against the ruling, expressed concern that the Court’s majority interpretation of SOX creates a “sweeping source of litigation,” stating that the law’s punishments now extend to domestic workers including babysitters, nannies, housekeepers, and any other individual performing work for an officer, contractor, subcontractor, or agent of a public company.

A majority of Justices concluded that the language of the statute’s second reference to “employee” does not lay out any opinion or argument over whether an employee must be directly employed by the company.

The U.S. Department of Labor (DOL), which enforces federal whistleblower protections, had previously determined that the statute’s whistleblower regulations apply to employees of private contractors and subcontractors.

Although neither the Supreme Court’s decision nor language contained in the original statute state that a working arrangement must exist between the whistleblower and the public company, all nine Justices agreed that if the Court’s decision results in excessive litigation, Congress has the power to amend the law.