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eTrends - Department of Labor Broadens Protections for Sarbanes-Oxley Whistleblowers

10.31.2011

The Department of Labor's Administrative Review Board (ARB) recently issued a decision indicating that it will broadly construe "adverse action" with respect to whistleblower protections under Sarbanes-Oxley (SOX) for employees of public companies. In Menendez v. Halliburton, Inc. , Case No. 09-002, 2011 DOL Ad. Rev. Bd. (Sept. 13, 2011), the ARB ruled that the disclosure by the company of a whistleblower's identity to co-workers – even though the co-workers likely knew he was the whistleblower – was an "adverse action" under SOX.

Anthony Menendez worked in Halliburton's financing and accounting department and approached the company's chief accounting officer with allegations of questionable accounting practices. After the company and the company's external auditor, KPMG, disagreed with Mr. Menendez's concerns, he reported his concerns confidentially to the Securities and Exchange Commission (SEC) and the audit committee of Halliburton's board of directors. Mr. Menendez claimed he expected his complaint to remain confidential as required under SOX and Halliburton's stated policy. The audit committee complaint was allegedly forwarded by the company's general counsel to KPMG and the company's chief financial officer and chief accounting officer. In addition, the chief accounting officer allegedly forwarded an email identifying Mr. Menendez as the complainant to members of Mr. Menendez's department. Mr. Menendez complained that, after this disclosure, he was ostracized by co-workers and that KPMG auditors refused to interact with him as they had previously. Both the SEC and the company's audit committee found no basis for Mr. Menendez's questionable accounting allegations. Mr. Menendez was then reassigned from directly reporting to the chief accounting officer to reporting to the director of external reporting. He subsequently resigned, claiming he believed he was demoted by being required to report to a lower ranking officer. Mr. Menendez then filed a complaint with the Department of Labor under Section 806 of the SOX claiming he was retaliated against as a whistleblower and suffered an "adverse action."

Halliburton argued that exposing Mr. Menendez's identity to his co-workers and KPMG had no "tangible consequence" to Mr. Menendez in part because those co-workers and KPMG auditors already knew that Mr. Menendez was the whistleblower. The ARB rejected a requirement that there be a "tangible consequence" in order for adverse action to be found and adopted the standard set forth in its decision Williams v. American Airlines, Inc. (ARB No. 09-018, 12/29/10) that an "adverse action" encompasses any "nontrivial unfavorable employment action," either as a single event or in combination with other actions. The ARB refused to apply the narrower standard from Burlington Northern & Santa Fe Railroad Co. v. White, 548 U.S. 53 (2006) (adverse action under Title VII), that an adverse action is one that would deter a reasonable worker from engaging in the protected activity. However, the ARB noted that Burlington does serve as "a helpful guide for the analysis of adverse actions under SOX."

The ARB found that because Section 301 of SOX requires a company to have a procedure for the anonymous receipt of complaints, Mr. Menendez had a right to confidentiality that was a "term and condition of his employment," Halliburton denied Mr. Menendez that right, resulting in an adverse action.

The Menendez case indicates that the Department of Labor will set a low threshold for SOX retaliation against a whistleblower. Although it remains to be seen whether federal courts will follow the ARB in applying the lower standard for adverse action, employers should be cautious in taking action in response to an employee's claim of financial misconduct. The case also indicates the need for employers to train executives and members of legal and human resources departments on internal complaint procedures to ensure that those procedures are specifically being followed, particularly with respect to confidentiality.

Please contact Rose Kenyon with any questions.

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Smith Anderson publishes eTrends periodically as a service to clients and friends. The purpose of this eTrends is to provide general information about a significant legal development in the field of employment law. Readers should be aware that the facts may vary from one situation to another, so the conclusions stated herein may not be applicable to the reader’s particular circumstances.

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