The U.S. Supreme Court extended the whistle-blower protections provided in the Sarbanes-Oxley Act to include employees of privately held companies that are contractors or subcontractors of a public company. The high court’s ruling in Lawson v. FMR LLC, marks a significant expansion of the statute and opens the door for claims of a new class of workers from roughly 5,000 public companies to potentially 6 million private ones, including even the smallest “Mom and Pop” businesses.
The justices, voting 6-3, reversed the First Circuit’s finding, and permitted whistle-blower claims by previous employees of a privately held company that provided investment advice and management services to Fidelity’s mutual funds. Under the Court’s reasoning, the “contractor” language of § 1514A protects not only “mutual fund advisers and managers” employed by private contractors of public funds but also “[l]egions of accountants and lawyers.”
While the Lawson decision may leave open questions of exactly when private companies qualify as contractors or subcontractors of a publicly traded company, distinguishing whether a company is a contractor should be achievable by exploring a given company’s operations. Private employers should determine whether they may be found to have a relationship with a public company that gives rise to potential liability under SOX’s retaliation ban.
If so, private employers should be particularly careful when considering an adverse employment action against an employee who has engaged in whistle-blowing activity involving a public client and should implement policies and safeguards designed to minimize their exposure to retaliation liability under SOX. Specific steps, as further discussed below, include:
- Training supervisors and management;
- Reviewing policies and internal complaint procedures; and
- Ensuring proper documentation of employee discipline.
Train Supervisors and Management
Private companies should train their managers and supervisors about the variety of complaints under SOX’s scope, allowing them to spot potential SOX issues and quickly tip-off human resources. Management should also be aware that firing or taking any other adverse action against an employee who has expressed concerns about fraud at a publicly traded company for which their employer does work could have consequences.
Review Anti-Retaliation Policy and Internal Complaint Mechanisms
Private companies need to make sure that their anti-retaliation policies encompass the activities protected by SOX, which forbids retaliation against workers for disclosing things like mail fraud, wire fraud and Securities and Exchange Commission rules and regulations. A policy can address SOX by using specific language that prohibits retaliation against workers who speak up about shareholder fraud at public companies to which the employer provides services.
It is equally important to have a method by which employees can raise concerns about misconduct. Doing the same typically results in workers first reporting the complaint internally, rather than approaching an attorney or administrative agency. This also provides employers the opportunity to establish, early in the process, the precise nature of an employee’s complaints.
Document Employee Discipline
As with other areas of employment law, documentation of employee discipline is crucial. With the addition of a new potential whistleblower cause of action for some private companies, documentation can show that a company took a worker’s complaint seriously and took steps to resolve it. Documentation can also limit an employee’s arguments related to what she complained about and whether those complaints fell under the protections of SOX or any other anti-retaliation law.