In today's highly regulated workplace, employers are legally obliged to investigate a variety of complaints from employees and outsiders. Gone are the days where an employer could respond to a complaint with a casual, "I'll look into that and get back to you." For example, under the California Fair Employment and Housing Act, an employer is liable for unlawful harassment where it knows or should have known of workplace harassment and "fails to take immediate and appropriate corrective action." [fn1] Employers must likewise "take all steps to prevent harassment from occurring." [fn2] In practice, these obligations require employers to investigate all claims of harassment.

Moreover, it is often to an employer's advantage to conduct a sound investigation of alleged wrongdoing. Under law established by the United States Supreme Court in 1998, employers who have strong complaint and investigation procedures in place may have an affirmative defense to harassment claims brought under Title VII of the federal Civil Rights Act of 1964. [fn3] In California, employers who terminate employees for misconduct will be deemed to have "good cause" for the termination even if the employer is in fact wrong about the employee's conduct, provided that the employer reached its conclusion about the employee's conduct based upon a good faith investigation. [fn4]

Most recently, in response to the Enron and other scandals of the last few years, Congress enacted the Sarbanes-Oxley Act of 2002,[fn5] which imposed a variety of controls on public companies in an effort to curb the abuses that led to such scandals. (See our Employment Law Commentary, August 2002, Securities Fraud Whistleblower Protections Under the Sarbanes-Oxley Act of 2002, for details about Sarbanes-Oxley.) Among other things, Sarbanes-Oxley contains specific provisions protecting whistleblowers who report financial misconduct. [fn1] The Securities and Exchange Commission (SEC) has implemented certain rules requiring national securities exchanges and associations to prohibit listing securities of issuers not in compliance with certain rules. Among those is a rule which requires the Audit Committee of each board of directors to "establish procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters, and procedures for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters."7

Typically, with the enactment of each new law, employers add a new complaint and investigation procedure to its existing arsenal of complaint and investigation procedures. As a result, many employers now have, among others, a sexual harassment complaint procedure, an open door policy, a code of conduct or code of ethics and a whistleblower policy. Often, these procedures are inconsistent with each other. Even where they are not inconsistent, the policies allow individuals to report complaints through a variety of channels, including supervisors, the Human Resources Department, the Corporate Ethics Manager or Compliance Officer, the Board of Directors, the Audit Committee, the General Counsel and sometimes even an anonymous hotline operated by a third party vendor.8

This multiplicity of procedures and reporting channels creates confusion, especially when a complaint does not fit neatly in any one category. Certainly, under Sarbanes-Oxley, if an anonymous complaint about accounting, internal accounting controls or auditing matters comes directly to the Audit Committee, that complaint must be handled directly by the Audit Committee in accordance with the Company's Sarbanes-Oxley whistleblower policy. The same goes for complaints that come into a company's hotline that obviously relate to accounting or auditing matters. But, what happens when an employee complains to a mid-level manager that she received a poor performance review solely because she threatened to blow the whistle on accounting malfeasance she learned of through pillow talk which occurred during her involvement in a coerced sexual relationship with her supervisor? To whom should the mid-level manager report the complaint? Does Human Resources conduct a sexual harassment investigation? Does the Audit Committee investigate as prescribed by Sarbanes-Oxley? Does someone cut off the supervisor's access to the company computers during the investigation to prevent evidence tampering? Most important, who decides to whom the complaint should be referred for investigation, and who ensures a coordinated response with nothing falling through the cracks?

An Integrated Approach Overseen by a Qualified Committee

There is no one-size-fits-all approach to handling complaints and investigation procedures. However, one way to avoid the confusion that can occur when an employer receives a complaint is to adopt an integrated complaint handling and investigation procedure.

Many public companies have already adopted whistleblower policies as prescribed by Sarbanes-Oxley to address the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters by a company's Audit Committee, and to ensure that receipt of complaints from employees are confidential and anonymous. These policies also seek to address the other Sarbanes-Oxley requirement prohibiting company retaliation against an employee who "blows the whistle." Indeed, Sarbanes-Oxley does not prohibit the Audit Committee from designating an officer or other employee who is not a member of the Audit Committee to receive complaints regarding questionable accounting and auditing practices. By designating a "Compliance Officer" or other qualified employee to receive complaints, the company can screen complaints to ensure that only those falling under the Sarbanes-Oxley whistleblower policy are forwarded to the Audit Committee for consideration, while other complaints are directed to the appropriate departments.

The integrated approach suggested here is not designed to supplant whatever whistleblower policy the Audit Committee establishes. However, companies do not operate in ivory towers. Employees do not always lodge their complaints with the people designated to receive them, nor do complaints come in neat, tidy packages addressing discrete issues. Some complaints clearly relate to auditing or accounting matters; some are mixed bags; and sometimes it is difficult to tell exactly what the crux of the complaint is.

Undoubtedly, many complaints registered by employees and others are not serious, do not have the potential to affect materially the financial condition or operations of the company, or do not involve accounting, internal accounting controls or auditing matters. Examples of such complaints might include run-of-the-mill worker's compensation claims, complaints about the results of a performance review or complaints about compensation, unrelated to alleged discrimination or harassment. Most companies already have adequate policies in place to address such complaints. To streamline complaint handling, the integrated procedures suggested here should be limited to what we will call "Covered Complaints." For these purposes Covered Complaints include:

(a) whistleblower claims, other than accounting or auditing complaints, submitted directly to the Audit Committee;

(b) any complaint regarding accounting, or auditing matters not submitted directly to the Audit Committee;

(c) harassment and discrimination complaints of any kind;

(d) other complaints of alleged violations of law or policies (except for complaints of alleged violations of law or policies that do not involve any officer, director or other management personnel and do not have the potential for exposing the company to material adverse economic effects or publicity and do not involve accounting, internal accounting controls or auditing matters); and

(e) "Mixed bag" complaints, that is a complaint that addresses any combination of complaints.

To ensure compliance with the mandate of Sarbanes-Oxley that Audit Committees oversee all complaints relating to accounting, accounting controls or auditing matters and that there be a mechanism to lodge these complaints anonymously, Covered Complaints should not include complaints which clearly concern accounting or auditing practices that come directly to the Audit Committee or which are received by the company's Compliance Officer or hotline, anonymously or otherwise.

Receipt and Reporting of Covered Complaints

As noted, company policies often allow and encourage employees to complain to a variety of people. Moreover, companies cannot control to whom employees and outsiders complain. Companies therefore need a mechanism to ensure that all Covered Complaints are brought to the attention of senior management or any other appropriate body in a timely manner to ensure a proper and coordinated response.

Responding to a Covered Complaint requires immediate attention to a number of issues, including:

• Protection against potential physical harm from violent individuals or dangerous conditions on the premises;
• Protection of Company assets, including intellectual property;
• Regulatory compliance with a variety of laws such as securities laws, employment discrimination and harassment laws, wage and hour laws, environmental laws, and workplace safety laws, many of which have their own complaint handling procedures;
• Public and investor relations; and
• Special procedures embedded in employment or other contracts.

To make sure each of these issues receives proper attention, it is key to select the right person or persons to conduct the initial screening of the complaint. Placing the duty and responsibility for making all the right decisions in the hands of one person could be dangerous, unless that person is cross-trained in all the disciplines implicated by any employee complaint. Moreover, reposing in one person the duty to make sure a complaint is handled in accordance with the law and all company policies may not address the politics inherent in any particular organization.

For all of these reasons, employers may want to consider creating a Complaint Screening Committee ("Screening Committee"). Having a committee in place could make it much more difficult for any one person to cover up or whitewash a complaint. Depending upon the company, the Committee could consist of:

• Compliance Officer or Corporate Ethics Manager
• Chief Financial Officer
• General Counsel
• Human Resources Manager
• Chief Executive Officer if the Chief Financial Officer or any other Committee member is the complainant or the target of the Covered Complaint.9

Employers might then consider adopting a policy that requires anyone who learns of a Covered Complaint to report it to the Screening Committee. To ensure the Covered Complaint is handled fairly, the employer could also require anyone who learns of a Covered Complaint to keep the matter confidential after reporting it and prohibit anyone who learns of a Covered Complaint from taking any action with regard to the complaint or with regard to the terms and conditions of employment of the complainant, target of the complaint or key witnesses until receiving further instructions.

Initial Screening of the Complaint

Company policy could require the Screening Committee member who received the Covered Complaint immediately to report the Covered Complaint to all members of the Screening Committee. Of course, no member of the Screening Committee who is a complainant or target of the Covered Complaint should receive the report or participate in any way in handling the Covered Complaint.

To ensure the matter is handled promptly, company policy could further require the Screening Committee to convene immediately (say, within 24 hours of receiving the complaint, or sooner if warranted by the nature of the complaint) to screen the complaint and create an action plan by assessing the following:

• The nature (e.g., whistleblower, harassment safety) and seriousness of the complaint;
• What existing company policies or procedures may apply to the complaint (e.g., the whistleblower policy, the open door policy, the code of ethics, the harassment policy);
• Whether the complaint is required by law or company policy to be reported to the Audit Committee or any other person or entity. As a general proposition, all audit committees of public companies are likely to require that complaints relating to accounting, internal accounting controls or auditing matters be reported to the Audit Committee;
• Who within the Company should be responsible for investigating the complaint or overseeing the investigation under applicable law and the Company's policies;
• Whether to retain outside experts such as outside counsel, outside auditors or private investigators to advise the Company or to conduct the investigation and which such experts to retain;
• Whether any immediate steps need to be taken to protect physical safety or Company assets prior to commencement of the investigation (e.g., reporting potential physical violence to the police, suspending an alleged harasser pending investigation, suspending access to Company technology);
• Whether the complaint implicates or could implicate the provisions of any employment or other contract.

Regardless of who conducts the investigation, a member of the Screening Committee, called the Designated Member, could be appointed to follow the handling of each complaint after the initial screening. For example, the Designated Member could ensure that whoever is supposed to investigate is in fact investigating and that computer access is in fact cut off where a determination is made that someone's computer access ought to be cut off. To the extent consistent with Company policy, the Compliance Officer should be the Designated Member for all complaints regarding accounting and auditing practices. To prevent politics within the Screening Committee from interfering with the Screening Committee's performance, each member of the Screening Committee should have the individual responsibility and authority to follow all company policies and procedures and all applicable laws regarding Covered Complaints brought to the Committee, including, reporting any complaint regarding accounting, internal accounting controls and audit matters to the Audit Committee. As a crosscheck on the Screening Committee's conduct, the Screening Committee could be required to keep a log of all complaints brought to its attention and the Designated Member assigned to each complaint. Logs could be maintained in any number of ways, but a company's log should be available for inspection by the Audit Committee at any time. Most important, the Screening Committee should be limited to a screening and coordinating role. The Screening Committee should not itself investigate the merits of any complaint, and it should not be the responsibility of the Screening Committee to "validate" complaints.

Implementation of the Action Plan

After the initial action plan is developed, follow-through is crucial. Communication to those -- and only to those -- persons with a need to know is also crucial.

A company desiring a coordinated complaint-handling procedure could authorize and instruct the Designated Member to implement the action plan by:

• Assigning the investigation to the designated investigator or investigators (and coordinate investigations, where, for example, both Human Resources and Accounting matters are involved);
• Reporting the complaint to other persons or entities, such as the Audit Committee, as determined by the Screening Committee. Again, as a general proposition, in public companies, all Covered Complaints regarding accounting, internal accounting controls or auditing matters would be reported to the Audit Committee;
• Taking the agreed-upon steps to protect against physical harm or damage to or misappropriation of Company assets; and
• To the extent necessary, assisting with the retention of outside experts as determined by the Screening Committee.

In addition to the Designated Member, as a back up, another Screening Committee member could be charged with ensuring within 24 hours of creation of the action plan that the Designated Member has implemented the plan. At this stage, communication with the complainant and the target of the complaint is also crucial. Where the complaint is not anonymous, the Designated Member should speak to the complainant to let him or her know what the investigation procedure will be and what steps, if any, have been taken to protect the complainant from harm, including any steps to prevent physical harm. The complainant should also be reminded of his or her rights under the company's non-retaliation policy. The Designated Member should speak to the target of the complaint to inform him or her of the complaint, let him or her know what the investigation procedure will be and whether any immediate action will be taken in light of the complaint (such as suspending the target or locking out access to technology). The target should also be reminded of his or her obligations under the non-retaliation policy. If appropriate, as decided by the Screening Committee, the Designated Member should speak with the supervisor of the target to inform him or her of the complaint. The complainant, the target and the target's supervisor should be advised that the complaint and investigation will be handled as confidentially as possible. If appropriate, as decided by the Screening Committee, a witness should be present for each of these communications. The Designated Member and the witness should prepare a memorandum summarizing these communications.

Conduct of the Investigation

Different laws, policies and situations require different types of investigations. The appointed investigator should conduct the investigation in accordance with the law and company policies applicable to the investigation. The Screening Committee should not interfere with the conduct of the investigation, but the investigator should keep the Screening Committee apprised of the progress of the investigation. If necessary to protect the attorney-client privilege, communications should go through the General Counsel or outside counsel retained by the company. The investigator should first report his or her findings and recommendations orally to the Screening Committee, or, if necessary to protect the attorney-client privilege, to the General Counsel or outside counsel who can report it to the Committee. The Screening Committee should decide whether it wants a written report from the investigator, unless the Company policies or law applicable to the investigation require a written report.

Action in Response to the Investigation

Unless dictated otherwise by the law or company policies applicable to the complaint, the Screening Committee should determine what action to take in response to the investigator's recommendations and findings. The Screening Committee may need to involve other personnel in this decision, such as the target's supervisor or the complainant's supervisor, the Board of Directors, Audit Committee or the CEO. Unless the Screening Committee determines or company policy dictates otherwise, the Designated Member should oversee implementation of the action to be taken including:

• Communication with the complainant
• Communication with the target
• Communication with the supervisors of the complainant or the target.

In many cases, this communication might appropriately be done together with the Human Resources Manager and/or the supervisor of the affected employees.

The Screening Committee could designate one member other than the Designated Member to follow up reasonably soon after any decisions are made in response to an investigation to ensure that the decisions have been implemented. That Screening Committee member could report back to the Screening Committee so that the matter can be closed or calendared for further follow-up, as appropriate.

Any Screening Committee should keep records of all of its activities. Depending upon the situation, the documentation should be prepared as attorney-work product or as an attorney-client privileged communication.

Training

If an employer decides to adopt the integrated complaint handling approach discussed here, the company should conduct training for all supervisory personnel. Training should include training as to:

1. How to distinguish Covered Complaints from non-Covered Complaints;
2. Where to report Covered Complaints;
3. How Covered Complaints will be handled by the Company;
4. Obligation to keep complaints confidential until instructed otherwise;
5. Obligation not to take any action affecting the terms and conditions of employment of the complainant, the target or key witnesses unless and until directed otherwise by the Screening Committee; and
6. How to report complaints covered by Sarbanes-Oxley.

Conclusion

Having a coordinated approach overseen by an inter-disciplinary committee may go a long way toward making sure that employers give each complaint the attention it deserves while complying with an array of laws, policies and regulations. Because companies come in different shapes and sizes and because there is an array of laws applicable to employee complaints, employees should consult with counsel before adopting any new complaint handling procedure.

 

---

Footnotes

1: Cal. Gov. Code §12940(j)(1).

2: Id.

3: Burlington Industries, Inc. v. Ellerth, 524 U.S. 742 (1998); Farragher vs. City of Boca Raton, 524 U.S. 775 (1998).

4: Cotran v. Rollins Hudig Hall Int'l, 17 Cal. 4th 93 (1998).

5: 15 U.S.C. §7201 et seq.

6: 15 U.S.C. §78j-1.

7: Rule 10A-3 promulgated under the Securities Exchange Act of 1934, as amended.

8: Although Sarbanes–Oxley requires a mechanism for anonymous reporting of whistleblower complaints regarding accounting matters, employers may not want to encourage anonymous complaints of sexual harassment. It is very difficult to investigate anonymous harassment complaints since such complaints are usually personal in nature. Also, an alleged harasser who is terminated without an opportunity to know the identity of his or her accuser (and, thus, for example, identify any motive the accuser might have to lie) is more likely to prevail in a wrongful discharge claim.

9: While these suggestions are drafted broadly to encompass the structure typically found in public companies, they can easily be adapted for privately held companies.