Overview of Federal Whistleblower Regulations
Feb 09, 2011 QuickCounsel Download PDF
By Rachel Replogle, Esq., for the Association of Corporate Counsel
Whistleblowing is "[t]he disclosure by a person, usually an employee in a government agency or private enterprise, to the public or to those in authority, of mismanagement, corruption, illegality, or some other wrongdoing." The violation can be personal in nature, such as sexual harassment against the whistleblower, or general, such as excessive pollution that contravenes environmental regulations.
Despite its benefits to society and the offender organization (when the whistle is blown internally), whistleblowing is precarious business. The line between "savior" and "snitch" is very fine, and the whistleblower runs the risk of blatant or subtle retaliation in the workplace. For this reason, protection has been enacted not only by the federal government, but also by many states in the form of statutes and well-recognized common law actions. Additionally, whistleblowers may be entitled to seek recovery of traditional contract or tort damages resulting from employer retaliation.
Due to the variation between state law protections, this QuickCounsel focuses exclusively on federal whistleblower laws and regulations. It provides a brief overview of the most prominent anti-retaliation provisions applicable to companies today—namely those in the Occupational Health and Safety Act, False Claims Act, Sarbanes-Oxley, and Dodd-Frank Act.
Occupational Safety and Health Act and Related Statutes
Perhaps the most well known of whistleblower protections are those associated with the Occupational Safety and Health Act of 1970 ("OSH Act") which governs workplace health and safety standards in the United States. The enforcement agency created under the OSH Act, the Occupational Safety and Health Administration ("OSHA"), is charged with the protection of whistleblowers who report legal violations under the OSH Act and 19 other federal statutes.
Section 11(c) of the OSH Act expressly prohibits retaliation against whistleblowers who report safety and health-related workplace or environmental violations by an employer. Similar to other anti-retaliation provisions, an employee will prevail on a retaliation claim only if he or she can show that:
"Adverse action" is any action "that would dissuade a reasonable employee from engaging in protected activity," and includes, among other actions, firing, demoting, disciplining, intimidating, making threats, or reducing the pay or hours of an employee. The OSH Act’s broad definition of "employee" includes any current or former employee, as well as any job applicant and "individual whose employment could be affected by a company or company representative."
The statute of limitations on OSHA whistleblower protection claims are short, and can be as little as 30 days. Whether or not federal protections preempt state statutes will depend on whether the protection afforded by federal law is supplementary to that provided by the state. Each statute should be consulted separately to make this determination.
For additional information on whistleblower protection provisions enforced by OSHA, please refer to OSHA’s Employment Law Guide.
False Claims Act
The False Claims Act contains perhaps the oldest whistleblowing protection on the books; it was originally enacted during the Civil War in 1863 and was most recently updated in conjunction with the Fraud Enforcement and Recovery Act of 2009 and the Patient Protection and Affordable Care Act.
To prevail in a qui tam retaliation suit, the employee-whistleblower must be able to show that:
If the employee can prove all of the preceding, Section 3730(h) of the FCA entitles him or her to "all relief necessary to make the employee whole." In other words, the company can be forced to compensate the employee in any number of ways including, but not limited to, reinstatement, double back pay, special damages (court and attorneys’ fees), or any other remedies provided for by state wrongful discharge and other employment laws.
The Sarbanes-Oxley Act of 2002 ("SOX") was enacted in the wake of the Enron, WorldCom, and other major corporate scandals of the early millennium to regulate publicly traded companies on a wide range of corporate and securities issues. SOX applies to all companies with a class of securities registered under Section 12 of the Securities and Exchange Act of 1934 ("’34 Act"), that are required to file reports under Section 15(d) of the ’34 Act, and any contractors, subcontractors of agents thereof.
There are three sections within SOX that specifically protect whistleblowers: Sections 806, 301, and 1107:
Section 806 prohibits a covered company from discharging, demoting, suspending, threatening, harassing, or otherwise discriminating against either a whistleblower who has reported corporate misconduct internally or anyone who cooperates in legal or Congressional investigations of securities violations. The section was unique for its time in that it specifies internal whistleblowing as an appropriate and acceptable means of reporting corporate misconduct.
Despite its intentions, in practice Section 806 can make it more risky for companies to conduct internal investigations of anonymous allegations due to the likelihood of discovering a whistleblower’s identity during the process. Thus, it is often advisable for companies to retain outside counsel or forensic accountants to handle investigations so as to avoid the possibility of workplace retaliation, advertent or otherwise.
Section 806 also gives retaliated-against employees the right to bring a civil suit against the employer if a compliant filed with the U.S. Department of Labor goes unanswered for 180 days. Section 806(a) and OSHA protections are similarly broad in that the definition of "employee" includes current and former employees as well as job applicants.
If an employee decides to bring civil suit under 806(a), there is a 90-day statute of limitations period for filing with the Secretary of Labor which begins to toll upon the event of retaliation. Should the whistleblower prevail, he or she "shall be entitled to all relief necessary to make the employee whole," but will be limited to the amount of equitable compensatory damages.
An employee hotline is a popular compliance tool of choice used to meet these requirements, and contracting with an independent outside organization to manage the hotline service can help prevent unintentional violations of Section 806.
Failure to meet or maintain Section 301 standards can result in serious consequences including the disqualification of a company’s listings on any national securities exchanges or any other penalties provided for in the ’34 Act.
Section 1107 imposes civil and criminal penalties on companies and individuals who knowingly and intentionally retaliate against a whistleblower who provides truthful information regarding any actual or potential federal offense to a law enforcement officer. This provision is extremely broad; it is not limited to publicly traded companies (it applies to private companies and nonprofits as well), and can cover any violation of a federal civil statute reported to a "law enforcement officer." The definition of "law enforcement officer" further includes any federal officer, employee or agent "authorized under law to engage in or supervise the prevention, detection, investigation, or prosecution of an offense." Whistleblowers who report misconduct to supervisors, co-workers, members of Congress, and journalists, are not afforded Section 1107 protection.
The criminal sanctions under this section extend to individuals within the company, including supervisors and other retaliating co-workers, as well as the company itself. Individuals can be subject to a maximum of $250,000 in fines and/or 10 years imprisonment, and companies can be fined up to $500,000. In addition to the cost of penalties imposed by this section, employers should be concerned with the cost of defending both civil and criminal proceedings, perhaps simultaneously, should an allegation of workplace retaliation be made against them. Such actions could bankrupt even a financially healthy organization.
Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"), the largest piece of financial reform legislation in the United States since the Great Depression, was enacted in July 2010 in response of the financial crisis of 2007-2010. The first enumerated goal of the legislation is "to promote the financial stability of the United States by improving accountability and transparency in the financial system," and it aims to accomplish this by requiring regulators to create 243 rules, conduct 67 studies and issue 22 periodic reports during the nine months following its enactment. For this reason, much of what will come about as a result of Dodd-Frank is yet to be determined, but some of its effect on whistleblowing is clear from the start.
Dodd-Frank added a new Section 21F to the ’34 Act entitled "Securities Whistleblower Incentives and Protections." Most notably, the new section establishes a "whistleblower bounty program," similar to the one implemented by the IRS in 2006. As part of an effort to encourage whistleblowing, the program requires the SEC to pay an award to eligible whistleblowers who volunteer original information to the Commission that leads to a successful enforcement action with monetary sanctions in excess o $1,000,000. The bounty awarded will be between 10-30% of the total collected by the Commission. If multiple whistleblowers are eligible to receive awards, their amounts will be aggregated and the total aggregated bounty cannot exceed 30%. The bounty program does not provide amnesty from prosecution to those who report violations.
Particularly relevant to in-house counsel is the debate over whether the legislation should require that whistleblowers utilize internal corporate compliance mechanisms (hotlines, etc.) before seeking an award under the bounty program. The initial rulemaking proposal by the SEC acknowledged the debate, however specifically excluded such a requirement. The Commission emphasized that it intends to continue the practice of informing companies of complaints and allowing them to investigate and respond, under certain circumstances.
A similar whistleblower bounty program is being established within the Commodity Futures Trading Commission, however a whistleblower cannot receive bounties from both programs. Once both programs are established, a decision made by one commission will serve as collateral estoppel and prevent relitigation of the issue in front of the other commission.
In addition, the Dodd-Frank Act expressly prohibits employer retaliation against whistleblowers, and provides for private civil retaliation suits. The provisions apply to all employers and employees, regardless if they meet the requirements to participate in the aforementioned bounty program. However, although it does apply to private companies and nonprofits, the fact that the Act only punishes misconduct that violates securities laws effectively narrows the field of likely offenders to publicly owned companies and financial institutions. Employees are also now permitted to bring actions in federal court without first filing an OSHA complaint, which makes maintaining robust internal whistleblowing programs more important and beneficial than ever.
Whistleblowers pay an important role in the corporate world, and the federal government has decided to protect them accordingly. The abovementioned are just four of the nearly two dozen federal statutes that establish protection for whistleblowers. In-house counsel should familiarize themselves with statutes relevant to their organization’s business or industry to ensure that they know how to respond if regulators ever come knocking.
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