As Whistleblower Protections Expand, Companies Must Act

With more whistleblower complaints coming in to agencies like the SEC, more regulators adding rules to protect corporate whistleblowers, and a recent Supreme Court decision that expands whistleblower protections to employees of private companies, it's becoming apparent that all companies need to do more to address whistleblower retaliation risks.

Companies must contend not only with whistleblower protections included in the Dodd-Frank Act and Sarbanes-Oxley Act, but also with courts and regulators that continue to widen the scope of whistleblower protections. “There is a confluence of factors that is contributing to this uptick in whistleblower claims,” says Steve Pearlman, a partner in the labor and employment law department of law firm Proskauer.

Whistleblowers flooded the Securities and Exchange Commission, for example, with 3,238 tips and complaints during fiscal year 2013, up from 3,001 during the same period 2012. And with last year's record $14 million award, more informants are likely to come forward in coming years.

It's not just public companies that now have to worry about establishing whistleblower protections. In March, the U.S. Supreme Court ruled in Lawson v. FMR that the Sarbanes-Oxley Act prohibits not just public companies from retaliating against their employees for engaging in protected whistleblower activities, but also the private contractors of those public companies. The decision means that many private companies are now subject to Sarbanes-Oxley whistleblower claims, which could be problematic since most don't have proper anti-retaliation compliance controls in place.

The good news is that companies have the ability to reduce the likelihood of a whistleblower claim by avoiding the common cultural pitfalls that get them into trouble in the first place. A good first step is to have in place a code of conduct and an anti-retaliation policy, but it doesn't stop there; nor does it stop with having in place an open-door policy that simply encourages employees to speak up.

“Everybody has an open-door policy,” says Heather Sager, a member of the labor and employment group at law firm Vedder Price. The more important question is what happens after an initial complaint is made, even if that complaint is baseless, she says.

Complicating matters is that most employees who engage in protected whistleblower activity are, quite often, individuals who have reason to believe their employment may be in jeopardy. “I've seen many instances where an employee goes into a termination meeting with a very good idea of what's coming, and all of a sudden raises a complaint,” says Martha Zackin, a partner with  labor and employment law firm Bello Welsh.

Employees commonly presume that whistleblower protection laws create “a de facto get-out-of-jail-free card, where employers will be more hesitant to take adverse employment action following their protected activity,” says Sager. While that's not necessarily the case, companies must still use extreme caution in how they handle the claim. Documentation is critical in such cases, so employers can show the adverse action they take with an employee is not related to a whistleblower claim.

Other employees who commonly launch complaints may have a beef with their boss, or don't get along well with their coworkers—all traits that make it tempting to dismiss a whistleblower's allegations.

This is an area where companies commonly open themselves up to an anti-retaliation claim, because many managers and supervisors mistakenly assume that retaliation can't take place where a legitimate concern hasn't been raised.

“I've seen many instances where an employee goes into a termination meeting with a very good idea of what's coming and all of a sudden raises a complaint.”

—Martha Zackin,

Partner,

Bello Welsh

“Whistleblower protections, however, are not dependent on whether a concern is justified, or results in an actual legal violation,” Sager warns. Furthermore,  it's not always the whistleblower who creates the liability, as much as it is the operational managers who work with the employees on a day-to-day basis and make decisions in response to that protected activity, she says.

For this reason, managers and supervisors should take every complaint seriously, and look into them when they're reported. “They'd need to do an investigation,” advises Sager.

Standard Procedures

Companies also need to have in place “an established procedure for dealing with employee concerns that are raised,” says Stephen Berry, partner and chair of the Employment Law Department of law firm Paul Hastings. “Follow-up with those employees to let them know the outcome of the investigation and let them know what actions were taken.”

When reports are made and not addressed, it sends a message to employees that their concerns are not being taken seriously, says Zackin. That then makes it much less likely that employees will make reports going forward, opening the company up to potentially even greater liability.

“You always have an inherent risk of a rogue manager responding inappropriately to a whistleblower complaint,” says Pearlman. In those situations where retaliation does occur, it's crucial that the company reacts swiftly, effectively, and in a very transparent way to address the situation. “Determine whether and to what extent discipline is appropriate,” he says.

Companies further should document their measures to be able to show the actions they took.  “If you can show that you have a complaint-reporting procedure that's communicated to employees and encourages them to report wrongdoing, and you have an effective policy for handling reports of non-compliance, and that the complaint has been investigated, than you're going to have a much higher probability of defeating a whistleblower claim,” says Berry.

Effective Training

SUBJECT OF WHISTLEBLOWER COMPLAINTS

Below, the SEC discusses what top whistleblower complaints were in 2013.

In Fiscal Year 2013, 3,238 whistleblower TCRs (Tips, Complaints, Referrals) were received. By comparison,

for Fiscal Year 2012, the Commission received 3,001 whistleblower TCRs. The

table below shows the number of whistleblower tips received by the Commission

on a yearly basis since the inception of the whistleblower program:

The most common complaint categories reported by whistleblowers in the 2013

fiscal year were corporate disclosures and financials (17 2%), offering fraud

(17 1%), and manipulation (16 2%). By comparison, in Fiscal Year 2012, the most

common complaint categories reported by whistleblowers also were corporate

disclosures and financials (18 2%), offering fraud (15 5%), and manipulation

(15 2%).

Source: SEC.

Training is another important way to let management know that retaliation will not be tolerated, and that senior management sees the value in encouraging whistleblowing. Pearlman recommends “having a higher-level executive present, at least at the very beginning of the training, to show that the company takes anti-retaliation seriously.”

In addition, frontline managers and supervisors should be trained to recognize where the land mines are, what constitutes a formal complaint, as well as the right and wrong way to respond when someone voices a concern.

“There may be confusion about whether a complaint needs to be in writing, or whether it can be oral, or whether the complaint needs to be made to a certain specific person,” says Zackin. “It's important that there is some structure to the process, but that it's not so rigid that certain types of complaints are excluded.”

By having a robust and effective internal complaint process coupled with a culture that rewards ethical behavior and penalizes wrongdoing, Zackin says, “the company stands on much better footing, and is in a much better position to defend itself, if a complaint is made externally.”