Since Congress enacted the Sarbanes-Oxley Act (SOX) in 2002, the agency tasked with enforcing the law's whistleblower retaliation provision has dismissed more than 800 of the roughly 1,300 cases which have been filed, many on the ground that the employee alleging retaliation worked for a non-public subsidiary of a publicly traded parent. This trend has angered SOX legislative sponsors, who have called on the agency to change its position. Regardless, because SOX liability still could arise in certain situations, both publicly traded companies and their non-public subsidiaries should remain vigilant in their handling of reports of wrongdoing and other SOX-protected activity and should maintain good practices in dealing with employee whistleblowers.
Congress passed SOX in response to the Enron Corp. and Worldcom Inc. scandals. The act's whistleblower provisions offer the first federal protection for corporate whistleblowers, and provide remedies including back pay, reinstatement and attorneys' fees in the event of retaliation. SOX prohibits publicly traded companies or "any other officer, employee, contractor, or agent of such company" from retaliating against whistleblowing employees.
The SOX whistleblower protection provision applies to companies that have a class of securities registered under the Securities Exchange Act of 1934 (Exchange Act) or that are required to file reports under the Exchange Act. A whistleblower asserting a claim for retaliation must show that he or she was an employee of a company covered by SOX.
The Occupational Safety and Health Administration (OSHA) enforces the SOX whistleblower provisions and has investigated the roughly 1,300 whistleblower complaints since SOX went into effect in 2002. Of those, OSHA has dismissed more than 800 cases, many because the employee worked for a corporate subsidiary not covered by SOX, not its publicly traded parent.
Following OSHA's trend, earlier this year, Joseph Burke, a former employee at Olgilby & Mather Worldwide, Inc. (O&M), a non-public subsidiary of publicly traded WPP Group PLC (WPP), filed a SOX whistleblower retaliation complaint against both O&M and WPP, alleging that he was terminated in retaliation for his cooperation with a federal criminal investigation of O&M. The OSHA Administrative Law Judge (ALJ) upheld the dismissal of Mr. Burke's complaint because his actual employer, O&M, neither issued securities nor filed reports under the Exchange Act and therefore was not a company subject to the statute. The ALJ rejected Mr. Burke's argument that, as a subsidiary of WPP, a publicly traded company covered by SOX, O&M was also covered. The ALJ concluded that the plain meaning of the statute clearly states that "only employees of publicly traded companies are protected" under the statute.
SOX may still apply, though, if an employee shows that he or she was terminated by a person who is an officer, employee, contractor, subcontractor or agent of a publicly traded company. The key is whether or not the non-public subsidiary acts as an agent of its parent and such agency relates to employment matters.
In another more recent case, two employees of ING North America Insurance Corporation (ING NAIC), a non-public subsidiary four levels remote from its publicly traded parent company, ING Groep, N.V., a Netherlands-based corporation listed on the New York Stock Exchange, filed a whistleblower complaint after they were terminated by ING NAIC. Because the employees, Antonio Andrews and Niquel Barron, filed their case solely against ING NAIC, the ALJ dismissed their complaint because ING NAIC was not a covered company.
On appeal to the Administrative Review Board (ARB), the ARB agreed that ING NAIC was not a covered company. The ARB noted however, that it has rejected the blanket proposition that a non-public subsidiary cannot by definition be an agent of its public parent. The ARB remanded the case and ordered that Mr. Andrews and Mr. Barron be given an opportunity to show that ING NAIC had acted as an agent of ING Groep, N.V., the public company.
After the Wall Street Journal recently reported on OSHA's trend of dismissals based on the employee's allegations being directed at non-public subsidiaries, two US Senators, Patrick Leahy and Charles Grassley, responded with correspondence to the US Secretary of Labor, Elaine Chao, vehemently objecting to OSHA's interpretation of the SOX whistleblower provision. In addition, interest groups and other legislators have urged a legislative response to what has been perceived as an overly narrow interpretation which leaves unprotected those employees intended to be protected.
Although OSHA's recent trend may give both non-public subsidiaries of public companies and public parents some comfort when confronted with a SOX whistleblower retaliation complaint asserted by an employee of a non-public subsidiary, the trend may be met with a legislative response intended to broaden the scope of the statute's protection. In addition, neither non-public subsidiaries nor public parents should treat the trend as a reason to become complacent. In the event an employee can demonstrate that the adverse employment decision was made by the non-public subsidiary acting as an agent for the public parent or in the event that management from the public parent caused, provoked or participated in the decision leading to the adverse employment decision, a dismissal by OSHA will be less likely.
Further, OSHA's trend should not cause any company in a public company's family tree or the public company itself to downplay or treat any less vigilantly any sort of complaint, report or other conduct which could constitute protected activity under SOX. Such companies should continue to maintain solid, compliant reporting and response mechanisms and hotlines and should continue to take the steps necessary to ensure that all adverse employment actions are taken for objective, legitimate and demonstrably non-retaliatory reasons.