Whistleblowing – What Employers Need To Know

By:  John M. Bagyi, Esq., SPHR

Whistleblowing is a hot topic these days. Everywhere we turn, we see whistleblowers in the news - - Enron employees reporting corporate impropriety, Worldcom accountants reporting malfeasance, and sexual harassment scandals in the armed services. Whistleblowers even made the cover of Time magazine not long ago. In response, an increasing number of statutes to protect employee whistleblowers are emerging -- from Sarbanes-Oxley at the federal level, to a variety of provisions in state law, to anti-retaliation provisions in virtually every employment-related statute. With legal liability and reputations at stake, business owners and managers need to understand this fast-changing landscape, and prepare now to deal with whistleblowing issues before they surface.

What is a Whistleblower?

According to the dictionary, a whistleblower is an employee who refuses to engage in and/or reports illegal or wrongful activities of his employer or fellow employees. In short, it refers to someone who “blows the whistle” on improper or illegal conduct. But defining a whistleblower may be easier said than done. An employee who questions a particular accounting treatment might consider himself a whistleblower, while others would argue that he’s merely “doing his job.”

The Legal Status of Whistleblowing

The action of whistleblowing is relatively simple: an employee raises issues regarding allegedly improper or illegal conduct. Determining the legal status of a whistleblower is much more complex. First, what kind of allegation constitutes whistleblowing? Is objecting in a staff meeting sufficient, or must it be in writing (e.g. an email or memorandum)? Second, what level of improper or illegal conduct is sufficient to trigger whistleblower status? Is a reasonable belief that conduct is illegal enough (yes, in the case of anti-retaliation provisions of the employment discrimination statutes); or must the conduct actually be illegal.  Finally, to whom must the objection be raised? Sometimes employees complain internally, sometimes they proceed directly to outside agencies. Generally, either will trigger protection, but this varies by statute.

Types of Protection

Each whistleblower law provides employees, who feel they have been wrongfully retaliated against, with recourse against the alleged wrongdoer. Some laws provide that employees can immediately bring a judicial proceeding; other laws require employees to file an administrative complaint with an agency (e.g. Department of Labor) before commencing to court.

Typically, employees are entitled to “make-whole” relief, regardless of whether they go to court or to an agency. Make-whole relief often includes reinstatement, back pay, and attorney’s fees. In addition, most statutes allow for some additional recovery, such as compensatory damages for alleged pain and suffering.

Sarbanes-Oxley Act

Probably the most significant recent federal law covering whistleblowing is the Sarbanes-Oxley Act. Passed in 2002, the law contains a number of provisions designed to increase the reliability and accuracy of corporate reporting, accounting and auditing practices. It also creates federal protection for employees who blow the whistle on corporate misconduct. The whistleblower provisions currently apply only to publicly traded companies that are required to file reports with the SEC. However, some experts believe that it may be only a matter of time before whistleblower protections are extended to government contractors – including non-profit and privately held organizations. As a result of Sarbanes-Oxley, whistleblower claims have quickly moved to the head of the list of most prolific whistleblower claims filed with the federal Department of Labor.

Protected Conduct

The Act prohibits employers from taking any adverse action against an employee because he or she engages in protected whistleblowing. Protected whistleblowing includes the employee’s providing information about, or assisting in an investigation of, conduct that he “reasonably believes” to constitute a violation of: (i) laws that prohibit mail, bank, wire, radio and securities fraud; (ii) an SEC rule or regulation; or (iii) other federal law relating to fraud against shareholders. To qualify as protected conduct, however, the information or assistance must be provided to a federal regulatory (or law enforcement) agency; a member of Congress (or Congressional Committee); or a person within the company who has supervisory authority over the employee. Included in this latter category are those individuals in the company who have the authority to investigate, discover, or terminate misconduct prohibited by the Act.

Even if an employee mistakenly believes that conduct is fraudulent, his or her complaints will be protected if the employee’s belief was reasonable.

Criminal Sanctions

This law has some real “teeth,” too. Unlike other whistleblowing statutes, Sarbanes-Oxley provides for criminal sanctions against individuals who retaliate against whistleblowers.  If you have decision-making authority in your organization, you need to be careful before you take adverse employment action against a whistle-blowing employee.

False Claims Act

The False Claims Act (FCA) originally was enacted during the Civil War to control “fraud in federal contracts.” Amended in 1986, the FCA continues to be used to “ferret out fraud against the federal government,” and to encourage whistleblowing. The Act prohibits the submission of false claims to the federal government. The qui tam provisions of the Act authorize private citizens to sue on behalf of the government, with appropriate disclosures, and allow a private party suing on behalf of the government to share a percentage of the ultimate recovery.

The Act also prohibits retaliation by employers against employees who participate in False Claims Act proceedings. Employees are protected when conducting an investigation, initiating an action under this law, testifying in proceedings, and providing other assistance in furtherance of a claim under the Act. As with Sarbanes-Oxley, the employee need only have a good faith belief that a violation has been committed. He or she is not required to prove that the employer actually submitted a false claim.

Other Federal Laws

While too lengthy to discuss here, business owners and managers should know that other federal statutes offer some limited forms of whistleblower protection. Among these is the Civil Rights Act/Title VII, Americans with Disabilities Act, OSHA, FLSA, ERISA, and environmental protection statutes such as CERCLA, SWDA, Clean Air Act, Clean Water Act, etc. 

State Whistleblower Laws

Federal whistleblower law does not preempt state law.  Consequently, employers must also comply with more stringent state whistleblower laws.  For example, in New York State, employers are prohibited from taking adverse employment action against an employee who: (1) discloses (or threaten to disclose) to a supervisor or public body a violation of any law, rule, or regulation that creates a substantial and specific danger to public health or safety; (2) provides information or testimony to a public body about such violation; or (3) objects to or refuse to participate in such violation.

Avoiding Whistleblower Claims

There are two ways to avoid whistleblower lawsuits: (1) limit or eliminate the underlying illegal or improper conduct that gives rise to allegations of wrongdoing that trigger whistleblower status; and (2) treat the whistleblower properly, if and when such conduct is alleged. The following steps can help limit your liability as an employer for whistleblower retaliation claims:

1. Establish an Ethics Policy. This should be a catch-all policy stating that the organization will comply with all applicable legal duties it may have. A good ethics policy also contains a complaint reporting procedure, encourages employees to report misconduct, and provides for disciplinary consequences for employees who fail to do so. The policy should also assure employees that their complaints will be appropriately investigated, and that they will not be subject to retaliation for having complained in good faith. (See Appendix 1)
2. Establish a Complaint Reporting Procedure. Make the reporting procedure clear, and include it as part of your overall policy. Experts recommend that employers have a stand-alone complaint reporting procedure, also. A well thought out reporting procedure should contain multiple reporting outlets at a variety of levels (e.g. an anonymous 800 number, or third-party Web site (such as www.ethicspoint.com)).
3. Training on Ethics and Applicable Laws. Employers should train all employees on the content of their ethics policy, as well as any unique statutes or regulations applicable to the industry/organization.
4. Special Training for Managers. Managers should be required to undergo additional training on ethics and compliance with applicable laws. Included is training in how to recognize and respond to whistleblower activity.
5. Documentation of Performance and Conduct Issues.  Employers should maintain accurate and sufficient documentation of all employee performance and conduct problems if these problems could form a basis for discharging or otherwise disciplining an employee.

Finally, how your organization responds to a whistleblower complaint is very important. Appendix 2 sets forth what employers should do at the time a whistleblower complaint is received.

Disciplining Whistleblowers

Whistleblowers generally are entitled to protection against retaliation for having complained. However, they are not immune from future discipline for legitimate, nondiscriminatory reasons. Because of the protected status, employers should be careful to follow their progressive discipline policies and historical practices in the future disciplining of employees who have complained. This requires careful investigation of misconduct, and application of policy and practice to the situation.

Conclusion

Given the broad scope of whistleblower protection, employers must be very careful when employees report or allege potential wrongdoing within their organizations.  Employers are well-advised to take a proactive approach, developing policies and training employees before complaints surface. Only in that way can an organization deal appropriately with whistleblower complaints. Equally important, this approach will help minimize liability, if and when a whistleblower challenges actions within your organization.

The information in this article is intended as general background information on labor and employment law for JSEC members.  It is not to be considered as legal advice. 
John M. Bagyi counsels and represents employers in a variety of labor and employment-related contexts and is a Member in Bond, Schoeneck & King’s Albany office and can be reached by email (jbagyi@bsk.com), phone (518-533-3229) or fax (518-533-3299).

Appendix 1

Handbook Policy on Whistleblowing

Employers may find it advantageous to include a policy in their Employee Handbook to guide employees who wish to raise concerns over the activities of the employer. The policy should:

(1)       Provide reporting outlets for employees to complain about perceived violations of law or company policy;

(2)       Provide a means for employees to seek a clarification of company policy or applicable law before raising a complaint;

(3)       Give employees more than one option for raising their concerns, such as speaking to a supervisor and submitting a written complaint to management;

(4)       Assure that responsible disclosures will be taken seriously, including a commitment to promptly investigate, and take appropriate remedial action to address employee complaints; and

(5)       Provide assurances that employees who complain in good faith will not be subject to retaliation.

Appendix 2

Responding to Whistleblower Complaints

Responding to whistleblower complaints is important. Here are some things you can do now:

• Recognize Complaints. Sometimes whistleblower complaints will be obvious, but other times they will be more subtle. Increased sensitivity among supervisors and managers through training, and separate frivolous complaints from whistleblower activity.
• Investigate Complaints. Investigating a whistleblower complaint is no different from investigating any other employee complaint – the investigation should be prompt and thorough to address the allegations.
• Document the Investigation. This is critical to establish the appropriateness of the investigation, as well as to help gather the facts to address the underlying allegations.
• Remediate the Complaint. At the conclusion of the investigation, an assessment of the allegations should be conducted. At this stage, the employer must determine what, if anything, to do in response to the underlying allegations.
• Debrief the Complainant. It is important to close the loop with the complaining employee. This does not mean that all of the intimate details of the investigation and the employer’s plans to address the issues must be shared. Balance sharing details with the whistleblower against appropriate confidentiality.
• Have a Game Plan. Once the allegations have been addressed, the employer should consider ways to improve its processes to avoid future complaints. This presents opportunities to improve employee relations and the employees’ perception of the organization, as well as demonstrating a commitment to corporate ethics.
• Follow Your Policy. Throughout the entire process, follow your company policy, even if you plan to revise it. Failure to follow existing policy during a pending investigation it is often problematic in whistleblower litigation.
• Corporate With Governmental Investigations.  Employers should cooperate fully and provide governmental investigation with all relevant documentation and information that supports the employer’s legitimate, nondiscriminatory reasons for taking an adverse action against the employee.