Companies Rush to Adjust to New Whistleblower Rules

By AMANDA BRONSTAD
Staff Reporter

The days when a company could dismiss an employee's grousing over corporate practices are long gone.

Scrambling to respond to the requirements of the Sarbanes-Oxley Act, human resources directors at L.A. public companies are designing new corporate handbooks, holding employee briefings and going over reporting procedures with their attorneys.

Initially the subject of intense study for its impact on accounting procedures, the legislation, signed into law last year, offers extended protections for whistleblowers and may encourage costly retaliation lawsuits if not properly managed. The provisions related to whistleblowers become effective April 26.

The new law is forcing businesses to treat complaints over corporate practices with the same seriousness that has accompanied complaints of sexual harassment in recent years.

"It's almost like security at the airport, where you can't say you've got a bomb in a suitcase," said Paul Gleason, managing partner of the L.A. office of employment firm Ogletree Deakins Nash Smoak & Stewart PC. "Now, if someone makes a comment about any potential malfeasance, it's not going to go unnoticed even if it's made in jest or in a vague way."

In extending greater protections to employees who blow the whistle on financial misdeeds, companies face a new series of obligations, said Tony Oncidi, an employment partner at Proskauer Rose LLP.

"If a company is out of compliance with some provision as modified by Sarbanes-Oxley, the employee can take the position that he or she suffered retaliation for having brought that to the attention of the company. It does increase the likelihood people will file these suits," he said.

Extending state law

Whistleblower suits are more common in California than other states because employees are protected under a 20-year-old provision of the state's Labor Code.

Under that provision, employers cannot "retaliate" against an employee if he or she discloses a violation of state or federal statute to a government or law agency.

Most of the whistleblower cases brought under California's law have involved safety code violations, discrimination or leaves of absence, employment attorneys said. They also settle or get dismissed quickly, since the outcome of the case depends largely on a judge's interpretation of the broadly written Labor Code.

Paul Murphy, a partner at O'Neil Lysaght & Sun LLP who represented Global Crossing Ltd. whistleblower Roy L. Olofson, a former finance vice president, said the greater protections in Sarbanes-Oxley should make employees less afraid to approach their superiors about financial complaints.

Under California's law, whistleblowers must report wrongdoing to a government entity, rather than their managers, and they are more likely to lose their jobs if they speak up, Murphy said.

"Quite frankly, it's hard on the employee," he said. "For every case I've taken, there's five or 10 I've turned down or the client didn't go forward. That's because most of the time, they have not been terminated but believe they will be. I tell them if you go down this road, you will be terminated and it will be very difficult to get a job while this is pending."

Under Sarbanes-Oxley, whistleblowers who succeed in proving they were dismissed in retaliation for their actions must be offered their old jobs, Murphy said.

Also, under Sarbanes-Oxley, employees can obtain attorney fees from the former employer if they win their case, extending the protections offered under California law, which does not include attorney fees, he said.

Instead of just firing a whistleblower and dismissing or settling a subsequent retaliation lawsuit in court, employers now will have to discuss the employee's concerns with auditors, lawyers or some other third party, he said.

"Most companies are aware of the literal requirements of Sarbanes-Oxley," said Oncidi. "But the ripple effect is how it impacts their HR policies and potential law exposure. Those are just now becoming more evident."

That poses a challenge for many human resources executives.

"They're not sure what their scope of authority is," said David Kadue, a partner at Seyfarth Shaw in L.A. "If someone complains about harassment, they'll say that's my job. But what if someone complains to HR about improper expense accounting? I don't think a lot of companies draw the jurisdictional lines as to what HR does and does not. And they're not trained in financial matters."

Rachel Breitbach, corporate human resources director at Tetra Tech Inc. in Pasadena, said her company plans to use the same procedures as it would for discrimination or other complaints. An employee goes to an immediate supervisor, the supervisor's manager, to human resources or uses a confidential hotline phone number to report a complaint.

But because of the widespread potential impact of financial complaints, Tetra Tech, like other companies, is also considering appointing a compliance officer who would be a legal counsel who receives financial complaints.

"I'm not a financial person," Breitbach said. "If there is something going on that is illegal or against SEC regulations, there is a greater amount of stakeholders. Therefore, the reporting procedures may need to involve different levels of the organization to make sure they're appropriately dealt with because of the potential greater impact."

In the next month, Tetra Tech executives will ask employees to sign off on the company's reporting procedures, she said.


Whistleblower Protections
New federal law extends existing state coverage.

Sarbanes-Oxley Act of 2002 Public companies may not discharge, demote, suspend, threaten, harass or discriminate against an employee who provides information relating to fraud against shareholders. California Labor Code Section 1102.5 An employer may not retaliate against an employee for disclosing information to a government or law enforcement agency if the employee believes the information discloses a violation of state or federal statute.

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