The Burden of Proof for Employers

Posted on Wednesday, July 04, 2018

Section 806 -- it's the critical, often overlooked, whistleblower provision of the Sarbanes-Oxley Act (SOX). In recent years the provision has generated a host of litigation, redefined the burden of proof in employment cases and extended criminal liability against companies and individuals.

"Reasonable Belief"

Stacy Platone worked as Atlantic Coastal Airline's manager for labor relations until her dismissal. Platone claimed the termination was due to concerns she expressed about possible pay fraud by pilots. She alerted her superiors to the alleged scheme but testified she was told to ignore the issue.

Supervisors told Platone her termination was due to a romantic relationship she had with a Atlantic Coastal pilot who held a leadership position with the Airline Pilots Association and negotiated directly with management on a regular basis. The relationship caused a conflict of interest and a lack of trust and confidence.

The Department of Labor law judge indicated that the alleged fraud cost the airline between $20,000 and $25,000 a month.

In the 2004 ruling, the law judge found that Ms. Platone's immediate supervisor had initiated the process that resulted in her eventual termination in order to remove what he perceived to be an obstacle to successful cost-cutting negotiations with the union.

Potential Penalties

Sarbanes-Oxley can impose civil and criminal penalties and extend felony charges and liabilities to individuals -- as well as corporations.

The law applies to U.S. publicly-traded companies, private companies with publicly-traded debt, and foreign companies registered in the U.S.

Under the civil provisions, officers, employees, contractors, subcontractors or agents of the company are liable if they take a negative employment action against an employee who reports a reasonable belief that federal law has been violated related to corporate, mail or bank fraud or fraud by wire, radio or television.

However, unlike other anti-retaliation laws, SOX also imposes criminal liability against those who knowingly and with a retaliatory motive take action against whistleblowing employees.

SOX holds managers and executives personally liable. Individuals found guilty can be fined up to $250,000 and sentenced up to 10 years in prison. Corporate defendants face fines of up to $500,000.

In a SOX retaliation complaint, the Labor Department has 60 days to complete a preliminary investigation. If the matter is not completed in 180 days, the employee can take the case to federal court.

An example of the significance of this provision was illustrated in one ruling against Atlantic Coast Airlines, in which a Labor Department administrative law judge ruled that a whistleblower's suspicions of fraud were reasonable and she had grounds to believe that a fraud was being perpetuated on the airline, as well as its stockholders. (See right-hand box for details.)

"All that the Sarbanes-Oxley Act requires is that the [employee] reasonably believed that the [employer] engaged in such conduct, that she disclosed that conduct to the Federal authorities or to her employer, and as a result, she suffered an adverse employment action," the judge stated.

Under the law, whistleblowers do not have to prove fraud or that their dismissals actually involved retaliation.

That is a light burden because employees can meet the requirement by showing that the person firing them knew of their whistleblowing and they were terminated within a short time of the protected activity.

With SOX, the employer's burden is much heavier. The company must generally prove by clear and convincing evidence >that it would have taken the same action regardless of the whistleblowing.

In this respect, SOX significantly differs from other anti-retaliation laws where an employer needs only show a legitimate non-retaliatory motive for its action. Given this significant change in burden of proof, here are five steps your business should take to help ensure it is in compliance:

1. First and foremost, your audit committee must set up procedures for receiving, keeping and handling all complaints about accounting, internal accounting controls, auditing and other issues. Employees must also be able to report concerns in a confidential and anonymous manner.

2. Limit the number of people allowed to take complaints. The more staff members who receive them, the higher the potential for complaints to be ignored or not brought up high enough in the organization for the correct action to be taken.

3. Adopt codes of conduct and employment policies for reporting and dealing with complaints. Policies should encourage employees and others to report illegal corporate financial practices and clearly state that the company does not tolerate retaliation against employees who blow the whistle.

4. Train management about their responsibilities under SOX and revise job descriptions to make clear that compliance is part of a managers' responsibilities.

5. Properly document alleged misconduct immediately and review the documentation before taking action. Write down details of the complaint; interview witnesses; determine whether the employee has any motivation to file a false report and give feedback to the complainant during the investigation and at the conclusion.

Because a company must clearly and convincingly prove a negative employment action wasn't linked to whistleblowing, it is essential to have detailed documentation. If a whistleblower goes to Federal or state authorities and corporate wrongdoing is eventually found, civil or criminal penalties are likely to be lighter if a thorough internal investigation was conducted and appropriate action was taken.

Posted in Tax And Accounting Topics For Business

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