Whistleblowers Gain Ground on Retaliation Suits

Corporate whistleblowers suing employers for alleged retaliation may be gaining more traction in the legal system, with two plaintiffs recently winning reinstatement of their jobs and back pay through the Department of Labor.

The decisions have caused a stir in corporate legal circles because whistleblowers have rarely won retaliation claims filed under Section 806 of the Sarbanes-Oxley Act. Now, within one month, the Occupational Safety and Health Administration has sided with two workers and ordered their employers to pay a total of $1.6 million in back pay and other damages.

Pearlman

“This is really catching the eye of employers at a very high level,” says Steve Pearlman, a partner in employment law at the law firm Seyfarth Shaw. “It has people wondering whether we’re going to see a new era for whistleblower enforcement.”

On March 17, OSHA ordered Tennessee Commerce Bank to pay $1 million to its former CFO, George Fort, whom the bank suspended and then fired in 2008. Fort had previously expressed concerns about the bank’s internal controls, and ultimately refused to certify the bank’s annual report. As he became alarmed, Fort took his concerns first to the company’s audit committee and later to the Federal Deposit Insurance Corp. and the Tennessee Department of Financial Institutions.

Only two weeks earlier, OSHA ordered e-Smart Technologies to reinstate an unnamed California worker to his position and pay him $600,000 in back pay, interest, and damages. The employee filed a complaint when his job duties were systematically removed from him and his paychecks delayed, then stopped, after he questioned the accuracy of statements contained in a company’s filings with the Securities and Exchange Commission.

Tennessee Commerce Bank and e-Smart Technologies both have promised to appeal the OSHA rulings, but they must comply with the back pay and reinstatement requirements immediately while pursuing their appeals. OSHA also ordered e-Smart to post a notice to employees outlining their whistleblower protections. (How many people will actually see that notice is unclear. e-Smart’s last filing with the SEC in June 2009 was to describe a plan of reorganization and recapitalization.)

OSHA’s rulings may reflect a new approach brought in by the arrival of the Obama Administration, Pearlman says. “There were a number of complaints that the Department of Labor under the Bush administration didn’t give enough rigorous enforcement and was a little too employer-friendly.”

Foulke

Edwin Foulke, a partner at the law firm of Fisher & Phillips and former head of OSHA during the Bush Administration, says the Obama team has definitely brought a new focus to whistleblower enforcement. In addition, a report from the Government Accountability Office in January 2009 has helped steer enforcement in a new direction, he says.

The GAO report faulted OSHA for lacking a mechanism to ensure the quality and consistency of investigations, and said the agency didn’t provide investigators with the resources they needed to do their jobs properly, including equipment, training, and legal assistance. Since then, OSHA’s annual budget has climbed from $513 million in 2009 to $559 million for 2010, and $573 million proposed for 2011.

“I would hope that every case is based on its own merits, but if OSHA has more resources and more investigators, maybe that will allow them to gather more evidence toward cases.”

—Edwin Foulke,

Partner,

Fisher & Phillips

The study also noted that OSHA data shows 21 percent of whistleblower complaints led to an outcome that was favorable to the whistleblower. The new administration and the Democratic majority in Congress “thought that was incredibly low, so they clearly wanted more focus on this,” Foulke says.

Foulke does not necessarily believe more decisions in favor of whistleblowers will follow. “I would hope that every case is based on its own merits,” he says. “But if OSHA has more resources and more investigators, maybe that will allow them to gather more evidence toward cases, and that might lead to an increase in reinstatements.”

More resources might also push cases through the system more quickly, Foulke adds—and that would be welcome news for Corporate America, following a recent appellate court decision that employees can sue in federal court if the Labor Department fails to resolve a complaint within 180 days. That essentially gives employees a second chance to pursue their grievances, since current Labor Department bureaucracy almost guarantees that 180-day deadline can’t be met.

And more whistleblower cases are likely to come, says Mark Floyd, a partner in labor law at the firm Walter & Haverfield, since a poor economy prompts unhappy workers to make claims of all sorts, legitimate or otherwise.

Floyd

OSHA STATEMENT

Below is a statement from OSHA on its Tennessee Commerce Bank decision:

The U.S. Department of Labor’s Occupational Safety and Health Administration has ordered Tennessee Commerce Bank in Nashville to reinstate a former corporate officer and pay more than $1 million in back wages, interest, attorney’s fees, compensatory damages and other relief. The department found the bank had fired the individual in violation of the whistleblower protection provisions of the Sarbanes-Oxley Act of 2002.

“Sarbanes-Oxley provides protection to workers who report alleged violations of mail, wire, bank or securities fraud; violations of rules or regulations of the Securities and Exchange Commission; or federal laws relating to fraud against shareholders,” said Assistant Secretary of Labor for OSHA Dr. David Michaels. “This case clearly shows the department’s commitment to ensuring that individuals are provided the protections and relief afforded by the law and sends a strong message that retaliatory actions will not be tolerated.”

A complaint filed with OSHA in April 2008 named Tennessee Commerce Bank and Tennessee Commerce Bancorp Inc. as defendants. The complaint alleged that the employee was placed on administrative leave in March 2008 and fired in May 2008 after raising concerns about internal controls, employee accounts, insider trading and other issues. The complainant first raised concerns to the bank’s audit committee and later to the Federal Deposit Insurance Corp. and the Tennessee Department of Financial Institutions.

OSHA investigated the complaint as part of its responsibilities to enforce the whistleblower provisions of Sarbanes-Oxley and 16 other statutes protecting employees who report violations of various securities laws; trucking, airline, nuclear power, pipeline, environmental, rail, and workplace safety and health regulations; and consumer product safety laws. Fact sheets and detailed information on employee whistleblower rights are available online at http://www.osha.gov/dep/oia/whistleblower/index.html.

Either party to the case may file objections and/or request a hearing before the Labor Department’s Office of Administrative Law Judges within 30 days, but such an appeal does not stay the preliminary reinstatement order.

Under the numerous whistleblower provisions enacted by Congress, employers are prohibited from retaliating against employees who raise various protected concerns or provide protected information to the employer or to the government. Employees who believe that they have been retaliated against for engaging in protected conduct may file a complaint with the secretary of labor for an investigation by OSHA’s Whistleblower Protection Program. For more information, visit http://www.osha.gov.

Source

OSHA (March 18, 2010)

“People lose their jobs and use the process to see if they were terminated without purpose,” Floyd says. “They file a complaint and have the protection of having someone else investigate their claims without hiring a lawyer. It doesn’t cost them anything. Many claims are being filed that don’t have merit.”

Anonymity Hurts?

In a related vein, recent academic research into whistleblower claims finds that complaints often die more quickly when they are reported to a corporate audit committee anonymously—especially if the complaint threatens the reputation of corporate directors.

Rose

Audit committee members are perhaps too hasty to assume that anonymous tips carry little or no credibility, says Jacob Rose, an accounting professor at the University of New Hampshire who conducted the research. He examined how 83 audit committee members scrutinized reports of financial shenanigans by corporate officers.

“Basically, they don’t think the anonymous ones are credible, and they don’t allocate resources toward investigating the anonymous ones,” Rose says. “And it’s not a matter of whether it was statistically significant; when the allegation is anonymous, it doesn’t get investigated at all. That’s a little scary since we’re basically relying on these as our primary defense against fraud.”

Rose says policymakers should consider establishing a different avenue for tips arising from whistleblower hotlines to be investigated by more independent parties, such as outside counsel or an outside audit firm.

Peterson

Alice Peterson, chief ethics officer and special adviser to advisory firm SAI Global, says that if companies are following best practices, there should be adequate independence built into their process of reviewing whistleblower allegations.

“Sunshine really is the best disinfectant,” she says. “When all board members have access to the risk register or whistleblower case management system it is far less likely that a single director or audit committee will act in his or her own best interest when addressing a serious allegation.”