Overview

The Sarbanes-Oxley Act of 2002 (the “Act”) was enacted on July 30, 2002. The stated purpose of the Act, which was passed largely in response to the financial scandals of the late 1990s and early 2000s, is to “protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities law”. While the majority of this law addresses corporate-governance, accounting and auditing issues, it also contains provisions which impact directly upon employer-employee relations. The Act applies to any company which has issued a class of securities registered with the Securities and Exchange Commission (SEC) or which is required by the federal securities law to file reports with the SEC.

Section 806 of the Act provides whistleblower protection to certain employees of publicly traded companies, non-public companies whose debt instruments are publicly traded, and foreign companies registered to do business in the United States. In addition, an employee may file a civil action for violation of the whistleblower provisions of the Act against an officer, employee, contractor, subcontractor, or agent of any such company. The United States Department of Labor issued final regulations to Section 806 of the Act in August, 2004.

In an effort to encourage employees to be forthcoming concerning conduct which the employee reasonably believes constitutes a violation of the federal criminal statutes prohibiting mail, wire, bank or securities fraud, any rule or regulation of the SEC, or any provision of federal law relating to fraud against shareholders, certain employees are protected from retaliation under the Act. Such protection is afforded to any employee who lawfully provides such information or assistance to (1) any federal regulatory or law enforcement agency; (2) any member of Congress or any Congressional committee; (3) any person working for the employer who has “supervisory authority” over the employee, and/or (4) any other person working for the employer who has the authority to investigate, discover or terminate misconduct.

In addition, employees have whistleblower protection under the Act if they file, cause to be filed, testify in, participate in, or otherwise assist in any proceeding which is filed or about to be filed relating to an alleged violation of such statute(s), rule/regulation, or provision of federal law. Specifically, the Act prohibits covered employers from discharging, demoting, suspending, threatening, harassing or in any way discriminating against an employee in the terms and conditions of employment because of the employee’s protected activity.


Enforcement

The Secretary of Labor has the authority to enforce the Act. However, the Secretary of Labor has delegated that responsibility to the Occupational Safety and Health Administration (OSHA), and initial investigations are undertaken by OSHA. Under the Act, an employee must file a claim with OSHA within ninety (90) days after the date on which the violation occurs. If the Department of Labor does not issue a final decision in the case within one hundred eighty (180) days after the filing of the complaint, and there is no showing that the delay is due to the bad faith of the claimant, the employee may bring an action against the employer in federal district court.

To prevail under the law, an employee must prove, by a preponderance of the evidence, that (1) he engaged in a protected activity or conduct, (2) the employer knew that he engaged in the protected activity or conduct, (3) he suffered an adverse personnel action, and (4) the protected activity was a contributing factor to the adverse employment action.

To rebut this claim the employer must demonstrate, by clear and convincing evidence, that the employee’s protected action did not precipitate the personnel action taken; that is, that it would have taken the same unfavorable employment action even in the absence of the protected activity.

If successful, a prevailing employee may recover “all relief necessary to make the employee whole”, including (1) reinstatement with all seniority rights, (2) back pay with interest, and (3) any “special damages” incurred, including reasonable attorneys’ fees, expert witness fees and other “litigation costs”.


Significant Litigated Issues under the Act

Despite the short tenure of the Act, there has been a fair amount of litigation and subsequent case law regarding its provisions over the past four years. As a result, a number of trends have emerged, and proponents of both employers and employees have begun to obtain a better understanding of how the Act will be administered and interpreted by OSHA, as well as by the federal courts. Some of these contested issues are as follows.

1. Statute of Limitations

The ninety (90) day statute of limitations to file a claim with OSHA is a strict one. It will only be extended, in general, when (1) the defendant has actively misled the plaintiff respecting the statute of limitations, (2) the plaintiff has in some extraordinary way been prevented from asserting his rights, or (3) the plaintiff has raised the precise statutory claim in issue but has mistakenly done so in the wrong forum.

The statute of limitations begins to run when the employee is made aware of the unfavorable employment action. Late filings have been held to be untimely even if the late filing may have been due to an error of a third party, and even when the parties have entered into a private agreement to toll the statute of limitations.

2. Preliminary Orders of Reinstatement

After a complaint is filed, the Department of Labor must make a determination within sixty (60) days as to whether there is reasonable cause to believe that the employee’s complaint has merit. If the employee makes a prima facia showing that retaliatory conduct has occurred, a preliminary order may be issued requiring the employer to reinstate the employee with back pay, and to pay all costs and expenses incurred by the employee, including reasonable attorney and expert witness fees. Either party may object to the preliminary findings and request a hearing.

Recently, the Second Circuit Court of Appeals issued a decision which took the “teeth” out of this provision. In Bechtel v. Competitive Technologies, Inc., the Court held that since such an order of reinstatement is a preliminary order, there is no judicial enforcement power over it, and thus such order cannot be enforced by the federal courts. Therefore, if an employer refuses to reinstate an employee whom the Secretary of Labor has preliminarily ordered to be reinstated, the affected employee effectively need not be reinstated until a final order is issued.

3. Holding Non-Publicly Traded Companies Responsible

Some employees have successfully held non-publicly held companies responsible under the Act on the theory that they acted as “agents” of a publicly-traded company.

For example, in Kalkunte v. DVI Fin. Servs., Inc., a non-publicly traded company, AP Services, was hired to operate a publicly traded company, DVI Financial Services, through bankruptcy. AP Services was deemed an agent of DVI Financial Services because AP Services main principal acted as DVI’s Chief Executive Officer, and admitted that he made the decision to terminate the claimant’s employment. In other cases where non-publicly traded companies have been held liable under the Act, the non-publicly traded company has been found to be almost inseparable from the publicly traded company, or subject to the same internal controls. See Morefield Exelon Servs., Inc. (holding that a non-publicly traded subsidiary of a covered employer could be held liable under the Act).

4. Holding Publicly-Traded Companies Responsible for the Actions of their Non-Publicly Traded Subsidiaries

Employees have also attempted, with some success, to hold publicly-traded parent companies responsible for the actions of their non-publicly traded subsidiaries. In general, a parent company will be held liable for the acts of its subsidiaries if it participated in the unlawful activity or exercised day-to-day control over the employee’s conduct and the incidents of his employment.

For example, in Platone v. Atlantic Coast Airlines, the Administrative Law Judge (ALJ) found that a publicly traded holding company of a non-publicly traded employer could be deemed an employer, where the holding company held itself out to be responsible for the non-publicly traded company’s actions. Likewise, in Collins v. Beazer Homes USA, Inc., the Administrative Review Board (ARB) held that the parent company could be named as a respondent because officers of the parent company had authority to affect the employment of employees of subsidiaries.

Most recently, in Klopfenstein v. PCC Flow Technologies Holdings, Inc., the ARB refused to dismiss an action against a parent company, noting that the individual who made the decision to terminate the complainant’s employment was both the President of the subsidiary, and the Executive Vice-President of the parent company.

OSHA and the federal courts have, to a certain extent, clarified the above issues. However, OSHA, the federal courts, and attorneys will continue to attempt to appropriately interpret and apply the whistleblower aspects of the Sarbanes-Oxley Act in the years to come.


David S. Feather, Esq. is an attorney located in Garden City, New York. Mr. Feather practices primarily in the areas of employment and labor law, handling such legal matters as employment discrimination, unlawful harassment, whistleblower claims, violations of the wage and hour laws, employment contracts, non-compete agreements, and severance agreements.