The Sarbanes-Oxley Act (SOX) was enacted to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to securities laws. A crucial aspect of SOX is the protection it offers to whistleblowers—employees who report fraudulent activities and other misconduct within publicly traded companies. A key question for potential whistleblowers is whether they can receive front pay as a form of compensation under SOX.
What is Front Pay?
Front pay is a form of equitable relief that refers to the money awarded for lost compensation during the period between judgment and reinstatement, or in lieu of reinstatement if the latter is deemed impractical. It is designed to make the whistleblower whole by compensating for future lost earnings due to the unlawful termination. This remedy is particularly significant for whistleblowers who cannot be reinstated to their former positions due to ongoing hostility, a toxic work environment, or other factors that would make reinstatement impractical or impossible.
SOX Whistleblower Protections
Section 806 of the Sarbanes-Oxley Act provides robust protections for employees of publicly traded companies, contractors, subcontractors, and agents who report certain types of fraudulent activities. This section prohibits retaliation against employees for engaging in protected activities such as providing information or assisting in investigations regarding conduct that the employee reasonably believes constitutes a violation of federal securities laws, SEC rules, or any provision of federal law relating to fraud against shareholders.
Remedies Available Under SOX
When a whistleblower suffers retaliation, they may file a complaint with the Occupational Safety and Health Administration (OSHA). If OSHA finds merit in the complaint, it can order remedies that include reinstatement, back pay with interest, and compensation for special damages, including litigation costs, expert witness fees, and reasonable attorney fees.
Front Pay Under SOX
The availability of front pay as a remedy under SOX has been a subject of legal interpretation. The statutory language of SOX does not explicitly mention front pay; however, courts and administrative bodies have recognized front pay as an appropriate remedy in certain circumstances.
For instance, in the case of Bechtel v. Competitive Technologies, Inc., the Department of Labor’s Administrative Review Board (ARB) awarded front pay to a whistleblower who could not be reinstated due to a severely damaged relationship with the employer. The ARB held that front pay is an appropriate remedy when reinstatement is not feasible, thus aligning with the goal of making the whistleblower whole.
Judicial Interpretation and Precedents
Several federal courts have also endorsed the awarding of front pay under SOX. In Wiest v. Lynch, the Third Circuit recognized that front pay might be awarded where reinstatement is not possible or practical. The court noted that front pay serves as a substitute for reinstatement, providing the whistleblower with the financial stability they would have had if not for the unlawful termination.
Similarly, in Klopfenstein v. PCC Flow Technologies Holdings, Inc., the ARB awarded front pay to a whistleblower, highlighting the importance of this remedy in situations where the employment relationship is irreparably damaged. The ARB emphasized that front pay should be calculated based on the length of time it would have reasonably taken the whistleblower to find comparable employment.
Factors Influencing Front Pay Awards
When determining the appropriateness and amount of front pay, several factors are considered:
The Length of Time Until Reemployment: Courts consider how long it will take for the whistleblower to find a comparable position. This includes an analysis of the job market and the whistleblower’s efforts to mitigate damages by seeking new employment.
The Whistleblower’s Age and Health: These factors can influence the likelihood of securing future employment and, consequently, the duration of the front pay award.
The Nature of the Employer’s Retaliation: Severe or egregious retaliation may justify a longer period of front pay.
The Employee’s Tenure and Past Employment Record: A long tenure and a strong performance record with the employer can support a more substantial front pay award.
The Availability of Comparable Employment: The scarcity of similar job opportunities in the whistleblower’s field can lead to a higher front pay award.