Sarbanes-Oxley retaliation claims apply to employees of contractors

SOX retaliation discrimination texasSarbanes-Oxley, passed in 2002 in the wake of the Enron disaster, includes a protection in Section 806 that employees of a publicly traded company from retaliation for whistleblowing on accounting fraud and other prohibited acts under Sarbanes-Oxley (SOX). In the past, most courts held that the employees of contractors to public companies did not enjoy protections from retaliation.

Last week, the Supreme Court decided Lawson v. FMR, LLC that held Section 806’s anti-retaliation protection applies to employees of contractors and subcontractors of public companies.

What is Sarbanes Oxley?

The Sarbanes-Oxley Act of 2002 is a federal statute passed in 2002 to improve auditing and public disclosure of several important areas of financial information of public companies. Sarbanes Oxley (often abbreviated as SOX) was a response to the accounting scandals of the very early 2000s.  These most notably include Enron, Tyco and MCI/Worldcom.

As we later saw in the 2008 crash, companies often use external accounting, auditing and reporting firms to shield accounting and valuation problems under the approval of external legitimate financial oversight companies.

The accounting scandals that led to Sarbanes Oxley primarily involved company management interfering with independent financial audits. Those allegedly independent audits allowed the company and its executives to argue the company was in better financial shape than true.

If an independent auditing firm checked off on the financial health of the company then it seemingly must be true. What actually happened was was executives and internal accounting departments manipulated data internally and used their relationships with auditors to craft dangerously inaccurate audits.

This led to inflated stock prices, overextending debts and executives cashing out. These financial scandals participated in the stock market collapse in the early 2000s, the erasure of a major accounting firm and Sarbanes Oxley.

Sarbanes Oxley has several components to improve auditing and force greater independence in supposedly independent audits. Internally companies must establish procedures to ensure data integrity and requires CEOs and CFOs to be personally responsible for the integrity of accounting data.

It also established a government agency to improve oversight and establish accounting standards. SOX also protects employees through anti-retaliation provisions.

Sarbanes Oxley Anti-Retalition Provisions

Sarbanes Oxley also protects employees from retaliation to encourage them to come forward when they know the company engaged in fraudulent accounting or auditing practices. Without anti-retaliation protections employees would fear firing or discipline for calling our their employers. Whistleblower protections under SOX allow employees to bring a private cause of action and sue the employer for retaliation.

Under SOX an employee may not suffer retaliation for providing information or participating in an investigation of accounting practices by reporting the information internally to a supervisor, externally to a law enforcement agency, or to Congress. Whistleblowers may not suffer termination, demotion, harassment, or other forms of retaliation. Firing a whistleblower is a form of wrongful termination.

Whistleblowers may file a complaint with the Department of Labor. If the Department of Labor does not pursue the claim then the employee may file suit and pursue the claim privately in court. An employee who wins a whistleblower claim under Sarbanes Oxley may be reinstated to the same position, receive backpay and recover attorney’s fees.

Importantly, an employee only has 180 days to file the complaint with the Department of Labor from the date of retaliation or the date the employee discovered (or should have discovered) the retaliation. If you believe your employer retaliated for disclosing accounting problems then you should contact an employment attorney right away.

What happened in Lawson v. FMR, LLC

Let’s first talk a little about the details of the case. The respondent, FMR, LLC (FMR) is the parent company of Fidelity Investments and its various operations. Fidelity is most known for their mutual funds although they have several other divisions. The structure of mutual fund management is bizarre but important to this case.

Mutual funds are publicly traded companies but have few employees. The mutual fund is basically just a pile of securities and cash. The funds contract their operations out to other Fidelity entities.

To the public Fidelity owns and operates its mutual funds. In reality the fund is a Fidelity company that contracts with other Fidelity companies to perform necessary services. They are “independent” companies by law. Importantly, the mutual funds contract financial services out to other Fidelity companies. That makes FMR, LLC and other Fidelity operations contractors to the mutual funds.

That’s how Sarbanes-Oxley applies to Fidelity employees. FMR is a a privately-held company. The two plaintiffs were FMR, LLC employees who raised issues with accounting practices of the company’s services on behalf of the mutual funds. The two employees suffered adverse employment action and subsequently filed suit against FMR, LLC.

How the Supreme Court ruled in Lawson v. FMR, LLC

FMR argued that Sarbanes-Oxley does not protect the employees of contractors from retaliation for whistleblowing on prohibited accounting practices. The Supreme Court rejected this position, looking at the text of the act and the intended purpose to protect the public from the sort of accounting practices that damaged employees and the public when Enron collapsed. It’s a little surprising, quite frankly, that it took fourteen years to reach this position.

Admittedly, some of the headings and titles in Sarbanes-Oxley suggest Congress may not have intended to cover contractors. It is hard to imagine SOX intended to provide such an enormous loophole by exporting accounting practices to contractors.

The dissent bemoaned the majority’s position for fear that it would expand SOX litigation. The lever on whistleblower litigation is on the contractors. Don’t retaliate against whistleblowers and you won’t find yourself staring at a tidal wave of SOX litigation.

Are employees of contractors covered by Sarbanes Oxley whistleblower protections?

Yes. After the Supreme Court ruling in Lawson v. FMR, LLC employees of contractors or subcontractors to public companies are covered by SOX. These workers are considered employees for whistleblower protections.

If you work for a company that performs accounting, auditing, or other financial services to a public company then you are now protected from your employer retaliating against you for reporting financial irregularities.

You can see why this is the obviously correct decision. The entire goal of Sarbanes Oxley is to prevent public companies from washing harmful financial data through seemingly independent third parties.

If companies can export their dirty deeds to outside vendors who fire whistleblowers then the statute loses a lot of purpose. Protecting employees of contractors gives companies far fewer options to hide financial problems.

If you work for a public company or a contractor to a public company and believe your employer retaliated against you for reporting harmful financial information then you should contact an employment lawyer right away.

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