Key Senators Dismayed by DOL's Narrow Application of Sarbanes-Oxley Corporate Whistleblower Provision

The Senate authors of the corporate whistleblower protection provision in the Sarbanes-Oxley Act have sent a letter to Secretary of Labor Elaine Chao expressing concern regarding what they described as DOL’s overly restrictive interpretation of the provision that has resulted in the exclusion of the employees of corporate subsidiaries from the whistleblower protections. Senators Charles Grassley (R-Iowa) and Patrick Leahy (D-Vermont) took direct issue with the DOL’s position that subsidiaries are not covered by Section 806 of the Act.

Asserting that the DOL’s position contradicts the spirit and goals of Section 806 as well as the intent of Congress, the Senators asked Secretary Chao to explain the basis for the agency’s stance. In addition, the Senators requested that the DOL temporarily suspend using an interpretation of this provision that exempts employees of subsidiary corporations from the whistleblower protections until they have received a response and supporting documentation from the Secretary.

Section 806 consists of three sections. First, it prohibits any retaliation against the whistleblower. Second, if the employer does take illegal action in retaliation, the whistleblower employee can file a complaint with the Department of Labor. If there is no final agency decision within 180 days, and the delay is not shown to be due to the bad faith of the employee, the employee may bring a case in federal court. Third, the Act requires both reinstatement of the whistleblower, back pay with interest, and all compensatory damages needed to make a victim whole should the employee prevail.

The Senators expressed dismay at learning that DOL has been using an overly restrictive interpretation of Section 806 to dismiss a majority of the complaints filed by employees of public companies who assert that they have been fired or treated unfairly because they reported fraud. They cited a Wall Street Journal report that, out of 1,273 complaints filed with the Department of Labor under this whistleblower protection provision since 2002, the government has ruled in favor of the employee only 17 times and has dismissed 841 cases.

Many of these cases have apparently been dismissed on the grounds that the employee worked for a corporate subsidiary, they noted, because DOL takes the position that subsidiaries are not covered by the statute. The Senators emphasized that, given the broad language of Section 806, there is simply no basis to assert that employees of subsidiaries of the companies identified in the statute were intended to be excluded from its protections.

In the view of the authors of Section 806, it violates congressional intent to restrict these important whistleblower protections to a small minority of corporate employees or to give companies a loophole to retaliate against those who would report corporate fraud by operating through subsidiaries. These protections against abuses were intended as a safety valve to protect the public, company shareholders, and, more broadly, foster confidence in the marketplace. Since Congress enacted Sarbanes-Oxley as a direct response to the fraud perpetrated by Enron through the misuse of its shell corporations and subsidiaries, reasoned the legislators, it is unreasonable to argue that subsidiary corporations are not covered by the whistleblower protection provisions of the Act.

Whistleblowers are vital in promoting accountability and transparency, continued the Senators, but they are extremely vulnerable to retaliation. They need and deserve the protection of the law and vigilant application of the law by federal agencies. Thus, they reiterated their demand for an explanation of DOL’s position that the whistleblower protection provisions do not apply to employees of subsidiary corporations given that this stance contradicts the spirit and goals of the statute as well as the intent of Congress.