"Most states have some sort of whistle-blower protection, but you have to jump through a lot of hoops," says Leonard D. Young, of counsel at Ulmer & Berne and former general counsel of Ferro Corp. "But before Sarbanes-Oxley, there was no federal statute specifically related to public companies and fraud against shareholders."
The whistle-blower provision of Sarbanes-Oxley requires that public companies establish procedures for employees to disclose "the confidential, anonymous submission ... of concerns regarding questionable accounting or auditing matters."
In addition to sweeping reforms regarding employee protection, Sarbanes-Oxley outlines significant civil and criminal penalties regarding retaliation against whistle-blowing employees.
The new whistle-blower provisions are consistent with other Sarbanes provisions that hold individual executives liable for their actions.
"What is interesting about Sarbanes-Oxley is it does something that other federal statutes, like that of sexual harassment, do -- it specifically permits a lawsuit or a private right of action against supervisors."
An employee has 90 days to file a complaint. However, if the Department of Labor does not resolve the matter within 180 days, the employee can sue in federal court.
In addition, once the suit goes to court, the burden of proof falls on the employer, who must prove by "clear and convincing evidence" that any action taken against the employee is irrespective of that employee's "protected" action.
The stakes are high for the employer, says Young.
"(Employees can sue for) reinstatement, back pay, interest and compensatory damages and the big one -- litigation costs."
As with many issues that begin with public companies, closely held and private businesses should be careful when drafting new policy. Young suggests businesses take a good look at existing ethics policies and guidelines, then, "train, train, train ... this is not something that you can put in the employee book and forget about it."
Young adds that smaller companies are better off in state court than in federal court.
"If they are not a listed company and Sarbanes doesn't apply to them, then the company should stay with the state statute, which is a little more business friendly." How to reach:Ulmer & Berne; www.ulmer.com