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Sarbanes Oxley and Whistleblowers

In the wake of several corporate scandals in the early 2000s, especially the accounting scandals at Enron and WorldCom, the United States government enacted the Sarbanes-Oxley Act of 2002. While there are numerous provisions in the law, specific wording allows for the protection of corporate whistleblowers. Many consider the Sarbanes-Oxley Act to be one the of most important whistleblower protection laws ever passed.

Previous whistleblower laws were often limited to providing legal remedy for wrongfully dismissed employees. While Sarbanes-Oxley does cover such a contingency, there are also four additional provisions. Sarbanes Oxley Whistleblower

  1. First, all publicly traded companies must create internal, independent audit committees, with established procedures where employees can file an internal whistleblower complaint while protecting their anonymity.
  2. Second, the Sarbanes-Oxley whistleblower protection sets down new ethical guidelines for lawyers who practice before the Securities and Exchange Commission (SEC). Under this section, attorneys are required to blow the whistle on their clients.
  3. Third, the law expanded protection regarding protecting whistleblowers from retaliation to every employer across the nation, not just publicly traded corporations.
  4. Fourth, the law grants jurisdiction in all matters related to whistleblowing to the SEC, and provides criminal penalties for violations of the act.

The Sarbanes-Oxley Act also contains specific provisions in title VII to employees of whistle blowers who lawfully disclose private employer information parties in a judicial proceeding pursuing a fraud claim as well as other parties that may have an interest in the enforcing the provisions of the Sarbanes-Oxley Act. The Act establishes two enforcement regimes for this provision. In the area of civil enforcement, OSHA investigates the matter and orders reinstatement or a penalty. In the event that OSHA does not make a determination within 180 days, the employee can sue for reinstatement and damages in federal court. The Department of Labor can order reinstatement while the matter is being litigated, which makes the Sarbanes-Oxley Act different from all other labor related statutes and regulations. The criminal enforcement aspect of the law charges the employer with criminal retaliation that carries a penalty of up to $250,000 and ten years in prison.

This whistleblower provision appears to be the most serious issue for the hotel industry raised by the Act because of the high likelihood that disgruntled employees will use it as a means to attack the firm. The statistics from OSHA regarding resolution of complaints indicates that 96% of the cases in which it concludes an investigation result in a favorable determination for the employer. If the investigation is not complete within the 180 day period and the employee brings the matter to federal court, it is possible that the discovery period will be excessively burdensome for the company because the claim of a violation functionally places the firm’s accounting practices at issue. Because of the potential high costs involved with the discovery process, there is a strong incentive for the hotel to settle the claim even in cases in which there was no wrongdoing. An alternative strategy by the hotel is to seek a summary judgment to dismiss the complaint based on the sufficiency of the allegations to establish a cause of action.

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