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SOX Whistleblower Protection Does Not Extend to Employees of Privately Held, Contractor Organizations

  • March 26, 2012

An employee of a company that is not a public company defined under the Sarbanes-Oxley Act of 2002 (“SOX”) cannot invoke the statute’s whistleblower protections by showing that his employer provides services to a defined public company that is subject to SOX, the federal appeals court in Boston has held in a case of first impression.  Lawson v. FMR, LLC, 2012 U.S. App. LEXIS 2085 (1st Cir. Feb. 3, 2012).  The Court stressed that “only the employees of the defined public companies are covered by [SOX’s] whistleblower provisions.” 

Applicable SOX Provisions

The SOX whistleblower provisions state:

No company with a class of securities registered under section 12 of the Securities Exchange Act of 1934, or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934, or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of any lawful act done by the employee

(1) To provide information . . . regarding any conduct which the employee reasonably believes constitutes a violation of 18 U.S.C.S. section 1341 [mail fraud], 1343 [wire fraud], 1344 [bank fraud], or 1348 [securities fraud], any rule or regulation of the [SEC], or any provision of Federal law relating to fraud against shareholders, when the information . . . is provided to . . .

. . . (C) a person with supervisory authority over the employee . . .

18 U.S.C. § 1514A(a)(1)(C) (2010) (emphasis added).

The Facts

In Lawson, the plaintiffs were two former employees of private companies that provided advice or management services to a company that is a defined public company covered by SOX.  The plaintiffs’ employers were not covered by SOX. The former employees alleged their employers terminated them because they raised specific concerns of illegal activity relating to their private employers’ services for the public company. 

Court Decisions

The trial court decided to allow the plaintiffs to bring their suit under SOX.  However, on appeal, the First Circuit court dismissed their claims, ruling that SOX provides only whistleblower protection to persons actually employed by a publicly traded company, not to employees of the company’s contractors and subcontractors.
 
The Court held that the “contractor” and “subcontractor” language found in Section 1514A(a) of SOX only prohibits those contractors and subcontractors from taking retaliatory action against persons who are employees of publicly traded companies.  In other words, “contractors” and “subcontractors” are prohibited from acting as “hired guns” to retaliate against the employees of publicly traded companies. The Court ruled that SOX does not apply to alleged retaliation by “contractors” and “subcontractors” against their own employees.

The First Circuit based its decision on a detailed analysis of the statute. It contrasted SOX with other whistleblower statutes with potentially broader reach. Ultimately, the Court observed that if Congress originally intended the term “employee” in SOX to have a “broader meaning than the one [the First Circuit] arrived at, [Congress] can amend the statute.”

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This decision contradicts the Department of Labor’s interpretation of SOX. DOL contends that the statute forbids contractors and subcontractors of publicly traded companies from retaliating against their own employees for raising complaints of the type that would be subject to SOX. 

Though Lawson is a favorable decision that limits the reach of SOX whistleblower provisions, case law and regulatory trends likely will place tension on this decision. It is increasingly common for regulators and plaintiffs to claim that individuals who are treated as “independent contractors” are really employees of the company to which they provide services. While the focus of such disputes often is on whether the company should be withholding and paying payroll taxes, arguments for coverage by the SOX whistleblower protection are similar.  In addition, to supplement limited investigative resources, Congress and regulators are promoting reliance on whistleblowers in more and more contexts. This creates pressure to interpret whistleblower protections broadly.

Regardless of how the limits of SOX whistleblower coverage may be defined in this evolving area of law, mitigating exposure to any claims of retaliation requires strong internal reporting mechanisms and taking whistleblower complaints seriously.

The Jackson Lewis LLP Corporate Governance and Internal Investigations Practice defends employers facing SOX Section 806 whistleblower claims.  The Firm also counsels employers on the proper classification of workers as independent contractors or employees.

©2012 Jackson Lewis P.C. This material is provided for informational purposes only. It is not intended to constitute legal advice nor does it create a client-lawyer relationship between Jackson Lewis and any recipient. Recipients should consult with counsel before taking any actions based on the information contained within this material. This material may be considered attorney advertising in some jurisdictions. Prior results do not guarantee a similar outcome.

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