Conflicting Rulings About SOX’s Scope Cause Private Company Employees To Stay With DOL Adjudication

|||Conflicting Rulings About SOX’s Scope Cause Private Company Employees To Stay With DOL Adjudication

Conflicting Rulings About SOX’s Scope Cause Private Company Employees To Stay With DOL Adjudication

October 2012

The Administrative Review Board (ARB) for the U.S. Department of Labor (DOL) recently issued a decision regarding the scope of the whistleblower protections under Sarbanes-Oxley Act of 2002 (SOX). In Spinner vs. David Landau and Associates, SOX’s whistleblower protections were extended to employees of contractors of publicly-traded companies.  In the Spinner case, the plaintiff was a Certified Public Accountant whose firm was providing accounting and auditing services for a public company.  Spinner contended he was a whistleblower who reported accounting and internal control problems involving the public company.

As required under SOX, the terminated employee filed a whistleblower complaint with the Occupational Safety and Health Administration (OSHA).  OSHA concluded that the accounting firm would have terminated the whistleblower employee regardless of the whistleblower complaint.  The employee appealed to an administrative law judge, who granted summary judgment to the employer on the grounds that the accounting firm itself was not a publicly-traded company, so the CPA employee did not have whistleblower protection.  This lead to the ARB decision summarized here.

The ARB concluded that the contractor’s employee had SOX whistleblower protection, as follows:

“The Department of Labor regulations implementing Section 806, which we are obliged to follow, define employee as “an individual presently or formerly working for a company or company representative . . . or an individual whose employment could be affected by a company or company representative.” 29 C.F.R. § 1980.101. A “company representative” is defined as “any officer, employee, contractor, subcontractor, or agent of a company.”  These regulations explicitly identify two distinct bases for coverage as an “employee” under the statute:

  1. coverage based simply upon being an employee (or former employee) of a named publicly traded company, or a “contractor, subcontractor or agent” of such company, and
  2. coverage based upon the more conventional master-servant relationship expressed as “an individual whose employment could be affected by” a named employer.

As explained in the preamble accompanying the regulations’ promulgation, the Department views Section 806 as “protect[ing] the employees of publicly traded companies as well as the employees of contractors, subcontractors, and agents of those publicly traded companies.”

Consistent with the Department’s understanding, the ARB has repeatedly interpreted Section 806 as affording whistleblower protection to employees of contractors, subcontractors, or agents of publicly traded companies, regardless of the fact that the contractor, subcontractor, or agent was not itself a publicly traded company.”

The ARB specifically mentioned its disagreement with a majority decision in Lawson v. FMR, LLC, 670 F.3d 61 (1st Cir. February 3, 2012).  Because of this disagreement, the ARB Spinner decision provides a detailed opinion intended to rebut the Lawson case majority.  In the Lawson case, the First Circuit addressed two investment advisors who worked for a private company that provided services as a contractor to a publicly-held mutual fund.

The First Circuit acknowledged that the issue in Spinner had not yet been previously addressed by a Circuit Court.  The issue was described in the same manner that the District Court certified:

“Does the whistleblower protection afforded by Section 806(a) of the Sarbanes-Oxley Act, 18 U.S.C. § 1514A, apply to an employee of a contractor or subcontractor of a public company, when that employee reports activity which he or she reasonably believes may constitute a violation of 18 U.S.C. §§ 1341, 1343, 1344, or 1348; any rule or regulation of the Securities and Exchange Commission; or any provision of Federal law and such a violation would relate to fraud against shareholders of the public company?”

The First Circuit reversed the district court, ruling that the FMR employees (working for a private company) did not have the Sarbanes-Oxley whistleblower protections.  Although the decision is lengthy, the crux of the ruling stems from the statutory language.  The majority decision states:

“We conclude that only the employees of the defined public companies are covered by these whistleblower provisions; the clause “officer, employee, contractor, subcontractor, or agent of such company” goes to who is prohibited from retaliating or discriminating, not to who is a covered employee and so does not violate the rule against rendering superfluous any statutory language.”

Noting that the majority ruling conflicts with “considered agency views to which circuit precedent compels deference”, the ruling obtained a dissent.  The minority states:

“… looking to the plain language of the statute, one can only conclude that there is no restriction limiting the statute’s application to employees of publicly held companies. As I have already pointed out, boiling the statute down to its relevant syntactic elements, it provides that “no . . . contractor . . . may discharge . . . an employee.” 18 U.S.C. § 1514A(a). The statute does not limit its coverage to “an employee of a publicly held company” — it just refers broadly to “an employee.”

In fact, the majority’s interpretation offends a longstanding rule of statutory interpretation, violating the statutory language by rendering the word “contractor” in the statute superfluous.”

Whistleblower retaliation is on the rise according to a September 2012 survey of ethics and compliance officers, human resources, internal auditors, legal counsel and other senior executives conducted by NAVEX Global.  This increase occurs in part because workers and employers now view retaliation in a broader light.  According to the report:

“Retaliation claims are expected to rise in volume, and the very definition of retaliation is also changing among employees. The survey results suggest a richer understanding of retaliation among both senior executives and rank and file employees. While once viewed as strictly a firing or demotion, the definition of retaliation now includes being shunned or being the target of negative comments from peers. Social media is also creating a new dimension to potential retaliation, as employers determine how to handle emerging issues such as cyber bullying and social media disclosures. Overall, there is an expected increase in whistleblowing reports within the next year, which may be due in part to the Dodd-Frank provisions that protect whistleblowers from retaliation.”

Employers should not rely on the First Circuit decision to ensure that they will not be held to SOX’s whistleblower provisions when serving as a contractor to a public company.  An employee has the option to make his appeal to the district court or through the DOL process.  In light of the Spinner decision described above, contractors’ employees will probably ensure that the DOL retains jurisdiction.

Fulcrum Inquiry provides turn-key whistleblower reporting systems.  These independently-operated systems are an inexpensive way of providing employers additional protection.  This article on Best Practices in Whistleblower Systems provides additional advice.

 

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