On July 30, 2002, President George W. Bush signed the Sarbanes-Oxley Act of 2002 (the "Act"). The Act will result in sweeping reforms for public companies and the accounting firms that audit those companies. While much of the Act focuses on protecting investors by improving the accuracy and reliability of accounting and auditing procedures and corporate disclosures made pursuant to federal securities laws, the Act also encourages employees of public companies to report violations of the Act and other matters pertaining to fraud against shareholders. In this article, we focus on the Act's protections for employees of public companies who assist or are otherwise involved in investigations relating to violations of the Act, SEC regulations, and securities fraud ("Securities Fraud Whistleblower Protections").

1. Summary of the Act's Whistleblower Protections

Section 806 of the Act provides federal protection to employees of public companies when they lawfully disclose information about fraudulent activities within their company. We summarize below the Act's Securities Fraud Whistleblower Protections, which became effective on July 30, 2002.

Section 806 of the Act states that no officer, employee, contractor, subcontractor, or agent of a publicly traded company may take any adverse employment action, or, in any other manner, discriminate against an employee for engaging in any of the following two categories of protected conduct:

Under the Act, adverse employment action includes discharging, demoting, suspending, threatening, or harassing an employee.

The Act provides employees with several remedies when their employers take illegal action against them for engaging in protected conduct. Specifically, the Act permits employees to take the following action if they believe illegal conduct has occurred:

After receiving a complaint from an employee claiming retaliation, the Secretary of Labor is required to conduct an investigation. However, the Secretary of Labor is not permitted to investigate an employee's complaint, unless the employee makes a prima facie showing that his or her protected conduct was a contributing factor in the adverse employment action taken by the employer. If the employee makes this showing, the Secretary of Labor must nevertheless refuse to conduct an investigation if the employer can demonstrate, by clear and convincing evidence, that it would have taken the adverse employment action despite the employee engaging in protected conduct.

Section 806 offers the following remedies to employees who prevail on their whistleblower claims:

The Act also potentially imposes criminal sanctions on employers and their agents for intentionally retaliating against employees who engage in protected conduct. Specifically, Section 1107 of the Act states as follows:

Whoever knowingly, with the intent to retaliate, takes any action harmful to any person, including interference with the lawful employment or livelihood of any person, for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any Federal offense, shall be fined under this title or imprisoned for not more than 10 years, or both.

Hence, employers and their agents can be criminally prosecuted, jailed, and fined if they intentionally retaliate against employees who provide information or otherwise assist law enforcement in securities or fraud-related investigations.

3. What the Act's Securities Fraud Whistleblower Protections Mean to Employers

While the contours of the Act are uncertain, the Act's Securities Fraud Whistleblower Protections should not be surprising to California employers. For more than 15 years, California law has prohibited employers from retaliating against employees who report wrongdoing to government entities. Cal. Lab Code § 1102.5(b) ("No employer shall retaliate against an employee for disclosing information to a government or law enforcement agency . . . [about] a violation of a state or federal statute or violation or noncompliance with a state or federal regulation"). Indeed, California law protects employees against retaliation for reporting unlawful conduct internally to their employer. Green v. Ralee Engineering Co., 19 Cal. 4th 66 (1998). Moreover, state and federal statutes have long prohibited employers from taking adverse employment action against employees who report unlawful conduct, or participate in investigations by government agencies into unlawful conduct. See 42 U.S.C. § 2000e-3(a) (prohibiting employers from discriminating against employees because they filed a charge, or assisted or participated in any investigation, proceeding, or hearing under Title VII of the Civil Rights Act of 1964); Cal. Gov. Code § 12940(g) (prohibiting employers from retaliating against employees because they filed a charge or participated in any proceeding under the California Fair Employment and Housing Act).

Nevertheless, we highlight the following three issues that are important to employers in connection with passage of the Act.

First, as discussed above, in a matter before the Department of Labor, these burden-shifting rules are not difficult to understand because they generally control only the circumstances under which a Department of Labor investigation will proceed. However, it is unclear how these burden-shifting rules, which generally apply only to Department of Labor investigations, will be applied in civil actions, not involving the Department of Labor, between an employer and an employee claiming retaliation.

Second, the Act, like other federal statutes, requires employees to exhaust administrative remedies before pursuing claims in federal court. However, unlike other state and federal statutes, employees must file a complaint with the Department of Labor in a relatively short time, within 90 days of the violation of the Act's Securities Fraud Whistleblower Protections. Inasmuch as California already permits employees who suffered adverse employment action for reporting wrongdoing to government entities to bring a civil action, and inasmuch as these employees have at least one year to bring such an action, it is unclear if the Act's 90-day limitation will amount to much in California.

Third, the Act provides a number of remedies to employees who establish retaliation. For example, it provides for reinstatement, and permits employees to recover back pay, interest, compensatory damages, and reasonable attorneys' fees and costs. Moreover, it potentially exposes agents of an employer (i.e., an employer's officers) to criminal punishment, including prison, for intentional retaliation.

Because the Act imposes liability on employers for retaliating against employees who engage in protected conduct, all employers need to be careful when they consider terminating, demoting, or even reassigning employees who complain about securities fraud. While these considerations may not be new to California employers, human resource professionals who work for public companies should understand the Act's Securities Fraud Whistleblower Protections, and be trained on the type of conduct that would be protected by the Act.