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Contractors Entitled To Whistleblower Protection Under Sarbanes-Oxley

Published by on March 25, 2014

In Lawson v. FMR, Inc., the U.S. Court of Appeals for the First Circuit held, as a matter of first impression, that only employees of public companies receive whistleblower protection against retaliatory actions by their employer.  The Court found that this protection does not apply to employees of contractors or subcontractors working for the public […]

In Lawson v. FMR, Inc., the U.S. Court of Appeals for the First Circuit held, as a matter of first impression, that only employees of public companies receive whistleblower protection against retaliatory actions by their employer.  The Court found that this protection does not apply to employees of contractors or subcontractors working for the public company. The U.S. Supreme Court took up the case — what did it conclude?

The Supreme Court disagreed with the First Circuit.  The Court found that Congress intended for the protections of 18 U.S.C. 1514A to extend to contractors based on the simple wording of the statute when it included “contractor” and “subcontractor” in the whistleblower protection section.  The Court found that restricting the protection to only employees would undermine congressional intent.  For industries like the mutual fund management industry at issue in this case, SOX protections would have no effect if it applied only to employees, because mutual funds have no employees.  All fund management is handled by private financial management companies operating under contract with the mutual fund holders.  Removing such protection would dissuade contractors from exposing securities violations that were largely responsible for the Enron disaster that inspired the Act.

The Court drew further support from a recent Department of Labor ruling on the whistleblower protections of the Dodd-Frank Act.  The administrative judges held that Dodd-Frank’s whistleblower protections extend to contractors, not just employees.  Given the similarity in the statutes, the Court found that the SOX protections could be interpreted in the same way as the Department of Labor interpreted Dodd-Frank.

Laconic Lesson:  Employers should be aware that this may mark the beginning of contractors receiving increased statutory protections once only available to employees under other employment statutes and updates to their employment procedures may become necessary.

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