"It's a continuing and increasing distraction for employers," says attorney Phillip Berkowitz, with Nixon Peabody in New York. "These aren't going away."
While from one perspective, Sarbanes-Oxley is just one of the many laws employers already cope with, its whistle-blower provisions also present unique challenges, say observers. Among them is that employers may find themselves forced to reinstate terminated employees even before their retaliation complaint is resolved.
Section 806 of the 2002 Sarbanes-Oxley Act provides legal protection against retaliation to employees of public companies who report suspected corporate fraud or other activities related to fraud against shareholders. Employers subject to its prohibitions include publicly traded companies as well as their subsidiaries, contractors and shareholders.
Employees who believe they have been retaliated against because of their whistle-blowing activity must file a claim with the U.S. Department of Labor within 90 days of the alleged retaliatory act.
If an administrative law judge of the Labor Department's Occupational Safety & Health Administration fails to reach a decision within 180 days--which observers say is increasingly likely given its growing case load--employees can have their cases heard in federal court.
Employers may have to reinstate the employee and pay back wages with interest as well as compensation for any special damages sustained as a result of the discrimination, including litigation costs.
The number of cases filed is growing fast. According to the Labor Department, there were 251 cases filed this year as of September 12, compared with 184 for all of 2004.
So far, employers largely have been successful in defending themselves against these claims. Out of the 491 complaint determinations since 2002, which includes multiple complainants from individual cases, 343 were dismissed, with the remainder withdrawn, settled or determined to have merit by OSHA.
But even if employers ultimately are victorious, defending themselves in these cases is costly, particularly if the employee decides to subsequently pursue his case in federal court. While only a relatively small number have done this so far, more are expected to do so.
And once in federal court, "You're then in a fully blown employment litigation, which can be extremely costly," because these claims tend to be very fact-sensitive and so require extensive discovery, says Richard J. Cino, an attorney with Jackson Lewis in Morristown, New Jersey.
Observers say they expect the number of claims to increase. So far, "there have been very few court cases, but that will certainly change with time and as more court decisions come out, then more and more people will be aware of the statute, and I think we'll likely see the number of cases continue to grow," says Robert Whitman, an attorney with Orrick, Sutcliffe & Herrington in New York, who observes that it is relatively easy for an individual to file a charge.
The law was hastily written and approved in response to the Enron and other financial scandals, and may have been too broadly written, observers say.
One major problem with the law, observers say, is that once a terminated employee establishes a prima facie case that there may have been retaliatory action, the employer must offer "clear and convincing evidence" that it would have taken the same adverse action even if there had been no whistle-blowing, which is a higher evidence standard than is required in other federal anti-discrimination laws.
Otherwise, OSHA may order the employee to be reinstated, even before final resolution of the case. This is different from other employment laws, where there is generally no reinstatement order until the very end of proceedings, says Carole Katz, a Pittsburgh-based attorney with Morgan Lewis & Bockius.
It can put employers in an awkward situation. "You can imagine the tension" when a whistle-blower "who has visibility into the inner workings of the company, and who is in an adversarial stance, is ordered to be reinstated," says Bradford Newman, an attorney with Paul, Hastings, Janofsky & Walker in Palo Alto, California.
Furthermore, under the law an administrative law judge "is compelled to find in the employee's favor and grant full relief" if the whistle-blowing "appears to have played any role in the decision to take the adverse action," however minor, says Mary Pivec, an attorney with Sheppard, Mullin, Richter & Hampton in Washington.
Some observers say fear of being associated with a Sarbanes-Oxley whistle-blower suit is leading some employers to settle even when they feel the claim has no merit. "They fear the potential bad publicity," says James Urban, an attorney with Jones Day in Pittsburgh.
However, Robert P. Riordan, an attorney with Alston & Bird in Atlanta, says, "My experience has been the opposite, that companies ordinarily are thoroughly convinced that the whistle-blower is not accurate in their accusation," and the last thing they want to do is pay him and have somebody "characterize that as some sort of admission of improper practice."
Sarbanes-Oxley is also encouraging employees of organizations that do not fall under the law, such as nonprofits, to take advantage of the many state whistle-blower laws, which can be broader in scope than the federal law, observers say.
"I have definitely seen in the past two years an increase" in the number of non-Sarbanes-Oxley whistle-blower cases brought at the state level, says Heidi Goldstein Shepherd, an attorney with Goodwin Procter in Boston. Sarbanes-Oxley "has had a spillover effect in that it's sort of raised awareness among the plaintiffs bar," she says.
Furthermore, a growing number of discrimination and harassment claims are being accompanied by charges that the employer engaged in inappropriate conduct, Berkowitz says. "Plaintiff lawyers are recognizing that simple allegations of discrimination may not get them as far as if they were to couple it with charges that somebody's cooking the books," he says.
Setting up complaint procedures, encouraging employees to speak freely when they see a problem and carefully documenting issues with problem employees can help reduce employers' chances of being hit with a retaliation claim under the whistle-blower provisions of the Sarbanes-Oxley Act, observers say.
Sarbanes-Oxley, in fact, has provisions that require employers to establish procedures that allow employees to confidentially file internal whistle-blower complaints.
Some employers may have already introduced such procedures to deal with the risk of age or sex discrimination claims, observers say.
Employers need to establish policies that make it plain what constitutes unethical conduct and to then implement procedures for employees to follow if they feel there has been a violation of these policies, Berkowitz says.
"I strongly recommend cultivating an atmosphere of trust with employees" so they are encouraged to come forward internally, rather than approach either an attorney or state agency, says Sara Goldsmith Schwartz, an attorney with Schwartz, Hannu in Andover, Massachusetts.
It is also important to carefully document poor performance.
Most employers already have an "intuitive sense" when it comes to terminating women or minorities to be sure everything is documented and then communicated to the person involved, says Robert Dow, an attorney with Arnall Golden Gregory in Atlanta. With Sarbanes-Oxley, "You have to extend that kind of thought process into the accounting arena."
From the September 26, 2005, issue of Business Insurance. Written by Judy Greenwald.