Witness Protection

Don't slay the bearer of bad news. That's the message Congress sent companies when it finally hammered out a law last summer to curtail corporate misconduct. While the Sarbanes-Oxley Act of 2002 got plenty of media attention, chances are you haven't heard about this provision protecting whistle-blowers, which applies not only to publicly held companies, but also to those who advise them. Corporate scandals and the Time Persons of the Year brought whistle-blowers into the limelight, but the need for you to pay attention to their rights will continue long after the attention has died down.

Suppose an employee suspects his or her company is playing fast and loose with its financial reports. Being an upright citizen, he or she reports those suspicions to the federal government. The supervisor catches wind of this and fires the employee. Under the new provisions, that supervisor and company officers could face criminal fines or even jail time for such an action. It doesn't matter whether the employee's suspicions were correct; the key is reasonable belief that there are federal fraud violations.

The law is tied to existing definitions of fraud. It covers bank fraud; securities fraud; fraud by wire, radio or TV; and garden-variety frauds and swindles. Retaliation includes not only termination of the employee, but also demotion, suspension, harassment and other forms of discrimination. "You cannot take any deleterious actions that would affect the person's job," says Philadelphia attorney Anita B. Weinstein of law firm Cozen O'Connor. "That includes failure to consider [the employee] for promotion."

What's really unusual about the act is its scope. The provisions apply not only to officers of the company and the employee's supervisors, but also to contractors, subcontractors and "agents of the company." If your business provides consulting services to a publicly held company, and you advise clamping down on the snitch, you could land in jail with those who follow your advice.

While it's apparent why Congress took this tack, given the shady dealings of Enron and Arthur Andersen, it stands on fresh legal ground. "It's so broadly written that we have to wait for the courts to come down on who it applies to," Weinstein says.

There are other laws in the books protecting employees who sound the alert on toxic dumping and such, but they're limited to officers and supervisors. Never before has a law threatened criminal sanctions against third parties who advise the company. Sanctions may include fines of up to $1 million and up to 10 years in jail--and, of course, public humiliation of a criminal conviction, which doesn't exactly build investor confidence.

Meanwhile, the whistle-blower can win reinstatement and compensatory damages. On the other hand, if a court finds that the whistle-blower filed a frivolous complaint, the employer can recover attorney fees of up to $1,000.

So, if your company is publicly traded, don't discriminate against employees who notify the authorities about possible fraud, even if it's not true. Have a procedure in place to receive retaliation complaints and an audit committee to review them--both required by the act. And if your business is advising the big guys, watch what you say.

Steven C. Bahls, dean of Capital University Law School in Columbus, Ohio, teaches entrepreneurship law. Freelance writer Jane Easter Bahls specializes in business and legal topics.