7 - Employment Obligations - How The Corporate Accountability Law Will Impact Employment Practices


Most of the attention about the Sarbanes-Oxley Act of 2002 (Act), signed into law by President Bush on July 30, 2002, has been focused on the reform of public accounting firms and the financial reporting obligations of publicly held companies. However, the Act has other provisions that potentially impact a much broader range of employers.

The legislation includes the following changes that will impact employment practices:

1. New cause of action. Employees who provide information about actions they reasonably believe to be violations of securities law, rules of the Securities and Exchange Commission, or other federal laws relating to fraud against shareholders are protected. The report may be made to a federal regulatory or law enforcement agency, Member of Congress or congressional committee, or a person with supervisory authority over the employee or other person working for the employer who has the authority to investigate, discover or terminate the misconduct.

Although styled the Whistleblower Protection for Employees of Publicly Traded Companies, the act potentially extends farther as it covers not only publicly traded companies, but also their officers, employees, contractors, subcontractors and agents.  At a minimum that would seem to make officers and employees liable in their individual capacities, and potentially cover companies who do business with publicly traded companies, depending on how contractor and subcontractor are ultimately defined.

The Act incorporates the administrative scheme only recently enacted to protect employees of airline companies who provide air safety information.  Under the new law, the employee must file a complaint with the Department of Labor within 90 days of the alleged retaliatory act. Unless the employer can show by clear and convincing evidence that the employer would have taken the same action notwithstanding the protected activity, the DOL must investigate and issue its findings. The company and employee then have 30 days to file objections and request a hearing, or the determination becomes final and not subject to judicial review.

If a hearing is requested,  it is to be held expeditiously. Within 120 days after the conclusion of the hearing, the DOL is to issue a final order. If there is a violation, the employee is entitled to reinstatement, back pay with interest, and compensation for special damages sustained as a result of the retaliation, including litigation costs, expert witness fees, and reasonable attorney fees. (The DOL can actually order reinstatement based on its initial conclusion. Filing objections and a request for hearing will not automatically stay the reinstatement order.)

Judicial review is only available through an appeal to the Circuit Court of Appeals.  If the order was adverse to the employer, the appeal does not stay the Order unless ordered by the court.

Under the new  Act -- but not the airline whistleblower statute -- if the DOL has not issued a final decision within 180 days of the employee’s complaint,  the employee is permitted to file suit in the appropriate district court and may obtain the same remedies as can be awarded by the DOL.

2. Criminal penalties for employment actions.

One of the most potentially dangerous sections of the Act provides that anyone who intentionally retaliates against any person for providing truthful information to a law enforcement officer relating to the commission or possible commission of any Federal offense is subject to a fine and/or imprisonment of not more than 10 years. It is particularly important in the employment context as the Act specifically includes interfering with the lawful livelihood or employment of any person as an example of prohibited conduct. Although obviously it should be the rare case, this  arguably makes individuals involved in termination decisions that could be related to any of the broad range of federal crimes, face potential criminal liability.

3. Mandatory anonymous reporting.

Although not specifically tied to the whistleblower protection, a separate section of the Act requires  public companies, acting through the Audit Committee of their Board of Directors, to provide procedures for  the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters.

With some modification, employers may be able to use existing employee hotlines, but final determination will have to be approved by the Board’s Audit Committee which is given significant responsibility and independence under the Act.

4. Document destruction.

Two separate sections of the Act deal with enhanced criminal penalties for document destruction. One amends the existing witness tampering statute by prohibiting document destruction, alteration, or concealment with the intent to impair its integrity or availability for use in an official proceeding. Such conduct is punishable by fine and/or twenty years of imprisonment.

The other section is potentially even broader, covering not only destruction or alteration of documents, but also falsifying or making a false entry in the documents. Rather than being restricted to use in an ‘official proceeding’ it includes intent to impede, obstruct or influence the ‘investigation of any matter within the jurisdiction of any department or agency of the United States or any bankruptcy case, or in relation or contemplation of any such matter or case.’  The punishment is again a fine and/or imprisonment up to twenty years. Although it is not clear exactly how broadly this statute will reach, it arguably could cover any document that would be relevant to any EEOC charge, wage and hour investigation or similar matters.

5.  Notice of black out periods for trading stocks held in pension plans.

In an effort to avoid a repeat of the Enron situation where pension plans were frozen from trading while the value of the company stock rapidly declined, the law requires 30 days advance notice of blackout periods during which employees participating in employer offered benefit plans are prohibited from trading the company’s securities through the benefit plans for more than 3 consecutive business days.  Like the WARN Act, exceptions are provided for unusual circumstances.

The notice must be written in a manner that can be easily understood by the average plan participant and must include the reasons for the blackout period, an identification of the investments and other rights affected, the expected beginning date and length of the blackout period and a statement that the participant or beneficiary should evaluate the appropriateness of current investment decisions in light of the inability to direct or diversity assets credited to employee accounts during the blackout period.  The Secretary of Labor may include additional requirements in the regulations.  The notice may be sent electronically if it will reasonably reach plan participants.

In addition, during a black out period of 3 or more consecutive business days in which 50 percent or more of plan participants are impacted, directors and officers of the public company are prohibited from purchasing, selling or otherwise acquiring or transferring any company shares that were acquired in connection with the officer or director’s service or employment as a company director or officer.  If an officer or director violates this provision, the company is entitled to sue the officer or director for any profit obtained through the prohibited transaction to the company.  If the company does not sue, any shareholder can bring a derivative suit on behalf of the company.  The company’s right to recover profits obtained during a black out period applies irrespective of the officer or director’s subjective intent.  The exact details of these provisions will be finalized by regulations issued by the Secretary of Labor.  These regulations may create exceptions for transactions like purchases pursuant to an automatic dividend reimbursement program or purchases or sales made pursuant to an advance election.

Although the impact of the Act will be felt most strongly in the board room and finance department of publicly held companies, it is clear that the human resources function will be faced with new challenges.

If you have any questions about the Sarbanes-Oxley Act of 2002, or any other employment law matter, please contact one of our labor and employment lawyers listed above.

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