SOX Whistleblower Claims Have Been Resolved In Employers' Favor...But This May Change

March 2005

Sarbanes-Oxley (SOX) section 301(4) requires public companies to institute procedures to collect, retain and resolve complaints from employee's and other whistleblowers.  SOX section 806 provides protection against termination or other retaliation.  Complaints of retaliation are handled by the Occupational Safety and Health Administration (OSHA), which is part of the Department of Labor.  OSHA finalized rules covering its handling of SOX complaints on August 24, 2004.

Two and a half years after SOX's passage, over three hundred complaints have been filed.  Approximately ten percent of these have been settled before any determination was made.  The vast majority of the remaining cases have been handled by OSHA within the 180 days that OSHA has to issue a final decision.  Complaints not handled by OSHA within 180 days can be moved to federal court.

So far, employers have fared exceptionally well.  The vast majority of complaints have been dismissed at the OSHA investigatory level.  According to Nixon Peabody, in the cases decided by OSHA on the merits, employers have won six, and employees have won three.

This pro-employer result is somewhat remarkable in light of OSHA's regulations and the principles enunciated by OSHA's administrative law judges.  Based on these rules and principles, we predict that employees will start to do better once plaintiff lawyers gain more experience, and better focus on the unfair advantage that employees have.

Here are the highlights of the regulations and rulings that provide this employee advantage:

1. Under OSHA's regulations, the employee must first establish a prima facie case of retaliation.  Once this is done, the burden shifts to the employer to prove the rather high standard: "by clear and convincing evidence, that it would have taken the same unfavorable personnel action in the absence of the complainant's protected behavior or conduct."  (See 29 CFR 1980.04(c)).  This "clear and convincing" burden of proof is higher than imposed by other discrimination laws, such as Title VII.     
2. In Halloum vs. Intel, the employee claimed that Intel was purposefully delaying payment in order to increase short-term earnings.  This claim is frivolous to anyone who understands that cost recognition under accrual accounting is not triggered when a payment is made.  Nevertheless, an OSHA administrative law judge confirmed that an employee needs to show only that he had a "reasonable belief" of a law violation.  The fact that no law was actually violated is not a defense to a retaliation claim.
3. It is almost impossible for employees to get caught filing a bad faith complaint.  This occurs because of the combination of (i) the broad definition of potentially wrongful employer conduct (i.e., any provision of federal law relating to fraud against shareholders or violation of securities laws), and (ii) the exceptionally easy standard for filing an employee complaint (see #2 above).  Nevertheless, in the unlikely event of a bad faith or frivolous employee complaint, employers will get no relief through an award of "reasonable attorneys' fees", since the employee can not be charged more than $1,000 under OSHA's rules.
4. In Richards vs. Lexmark, the employer was able to show that it:

• previously transferred Richards several times because of performance issues and difficulty working with other employees,
• placed Richards on a performance improvement plan, and that inadequate progress had been made on that plan,
• was actively contemplating a termination for cause for several weeks prior to any complaint being received.

Nevertheless, an OSHA administrative law judge ruled that Richards' termination was retaliatory when it occurred a day after Richard's filed a complaint, because the timing created a causation inference.  For what it is worth, Richards' complaint involved an inventory calculation that might have had an impact on his boss's annual incentive bonus, but which could not have been material to the company overall.   

5. In Collins vs. Beazer Homes, the matter was heard by a federal judge because the employee filed in district court when OSHA did not issue a ruling within 180 days.  Collins was a new marketing employee that began having problems with her supervisor and co-workers almost immediately after starting work.  Collins made vague complaints of "cover-up/corruption", but did not provide specifics.  At no time was illegal activity alleged.  The District Court concluded that:



• the employer did not meet its standard of "clear and convincing evidence" (see #1 above) regarding the reasons for the termination
• the employee merely needs to show that she "reasonably believed" (see #2 above) that there was a violation of some law or regulation, and
• The time proximity between the complaints and the termination were more than adequate to suggest that Collins' complaints contributed to her termination.  This was true in spite of her short tenure and immediate problems in getting along with coworkers and superiors.
6. In Welch vs. Cardinal Bankshares, an OSHA administrative law judge found a retaliatory termination when the chief financial officer complained about accounting practices, and then was fired after he insisted on (i) tape recording meetings with senior management, and (ii) having his own attorney present during meetings.  In this case, approximately a year after its initial finding for the employee, OSHA awarded reinstatement, back pay with interest, and attorneys' fees & costs.

To avoid problems, employers are well advised to have an independently-operated whistleblower complaint system.  If the system is operated by personnel skilled in the underlying accounting, auditing, and internal control issues, proper information will be immediately collected, so that investigations are cost-effective and complete.

Fulcrum Inquiry is a CPA firm that performs special purpose investigations and forensic accountings.  We provide a comprehensive whistleblower complaint solution that uses trained accountants to gather complete information, address frivolous complaints, and minimize expensive special investigations.