Whistleblower Protection for Missouri Nonprofit Organizations

Transcription

1 Whistleblower Protection for Missouri Nonprofit Organizations Number 2 (Summer/Fall 2014) Missouri Policy Journal 1 Patrick Walker Lindenwood University Introduction A whistleblower is defined as an employee who in the scope of his or her employment reports a violation of the law by his or her employer. The violation may be against the reporting employee, or may be a general violation such as unlawful pollution practices against environmental law. The federal government and many states have laws protecting whistleblowers from retaliation for filing a claim or reporting a violation. 1 In addition, most states recognize a common law claim against an employer who takes action against an employee after he or she has reported a violation of law. The enactment of the Sarbanes-Oxley Act of 2002 (SOX) required publicly traded companies to focus on protecting whistleblowers and providing internal organizational mechanisms for employees to raise concerns without fear of retaliation. However, the scandals that prompted Congress to enact SOX have not been limited to the private sector, which includes nonprofit organizations. 2 Although nonprofits have not been immune to scrutiny or accusations of wrongdoing, SOX is not aimed at the nonprofit sector, nor does it contain legislative language applicable to nonprofit organizations. Patrick D. Walker is an Associate Professor of Nonprofit Administration at Lindenwood University in St. Charles, Missouri. 1 Thomson Reuters. Whistleblower Protections, Accessed October 5, Jason M. Zuckerman, Whistleblower Protection in the Nonprofit Sector, Nonprofit Risk Management Center, accessed October 5, 2014, 05.shtml. Only two provisions of Sarbanes-Oxley apply to nonprofits: retaliation against whistleblowers and destruction of documents that could be used in an official investigation. 3 Section 1107 of the statute makes it a crime for a nonprofit to retaliate against an employee who provides a federal law enforcement officer with truthful information about a nonprofit s having committed or planned to commit a federal offense. Although this provision has limited application, it has gotten much attention. In fact, some academic and legal literature describe whistleblowers as disgruntled employees or troublemakers rather than virtuous characters exposing organizational wrongdoing, and includes advice from legal experts often focused on how to deal with rather than protect the troublemakers. However, in November 2012, Congress passed the Whistleblower Protection Enhancement Act, strengthening the provisions to safeguard legitimate whistleblowers and broadening the range of issues covered by federal legislation. However, the act only focused on federal whistleblowers and not nonprofit employees. The other element of the statute that specifically applies to nonprofits is Section 1102, which makes it a crime for nonprofits to alter or destroy documents that should be maintained for use in official proceedings. It also makes it a crime to impede or obstruct such official proceedings. The legislation adds the qualifier corruptly to the prohibition, without explaining what exactly corruptly means. In any case, the destruction-of-documents language in SOX has led many nonprofits to adopt specific policies detailing which documents must be kept and for how long. Whistleblowers provide a valuable service to both their employers and the general public. Throughout history, whistleblowers have played a prominent role in the 3 Rick Cohen, Sarbanes-Oxley: Ten Years Later, Nonprofit Quarterly, December 30, 2012, accessed October 5, 2014, sarbanes-oxley-ten-years-later.html.

2 2 Missouri Policy Journal Number 2 (Summer/Fall 2014) discovery and remediation of employer and government misconduct in many areas including safety, public health, privacy, and corporate sales and marketing practices. 4 Employees are often in a unique position to recognize and report wrongdoing within both the private and public sectors. They can alert employers to problems before those problems escalate. If an employer refuses to resolve an issue, employees may be the only parties capable of reporting the problem to external authorities. One court noted, [w]ithout employees who are willing to risk adverse employment consequences as a result of whistleblowing activities, the public would remain unaware of large-scale and potentially dangerous abuses. 5 The presence of whistleblowers may help deter misconduct before it occurs. Information provided by whistleblowers can substantially reduce the cost to the public of detection and investigation of wrongdoing or corruption. Due to their important role as legal monitors, whistleblowers are frequently the victims of retaliation. 6 Over the past three decades, legislators and judges on both the federal and state level have struggled with the issue of how best to protect these employees. Thus, a consistent viewpoint on the best approach has not emerged. Diverse views and policy choices have led to very diverse whistleblower statutes and associated requirements. 7 Some statutes, for instance, protect an employee only if the employee reports an actual violation of the law. However, some statutes protect employees who are mistaken about an employer's wrongdoing if the employee reasonably believed that wrongdoing had occurred. Many statutes offer protection for a report of any violation of a law, statute, or regulation. Others protect only those 4 Gerard Sinzdak, An Analysis of Current Whistleblower Laws: Defending a More Flexible Approach to Reporting Requirements. California Law Review (December 2008). 5 Henry v. City of Detroit (Court of Appeals of Michigan, March 5). Missouri Revised Statutes. August Accessed October 5, Gerard Sinzdak, An Analysis of Current Whistleblower Laws: Defending a More Flexible Approach to Reporting Requirements. California Law Review (December 2008). 7 Ibid. employees who report legal violations that pose a substantial and specific danger to the public health or safety. 8 Some statutes cover only public employees, while others apply to both public and private employees. Whistleblowers can currently seek protection from three sources: federal statutes, state statutes, and wrongful discharge claims based on state common law exceptions to the employment-at-will doctrine. Federal laws are typically lenient to a whistleblower's choice of report recipient, allowing employees to report either internally or externally. State laws, on the other hand, normally limit report recipients. Although federal whistleblower laws are typically more specific and protective than state laws with respect to report recipients, they only protect reports of very specific types of employer wrongdoing namely, violations of a limited number of federal laws. The whistleblower provisions of SOX, for example, protect only employees of public companies who report unlawful accounting and other financial practices. Because the number of legal violations to which federal whistleblower laws apply is limited, most private employees must rely on state whistleblower laws, which generally cover reports of a violation of any statute or regulation. 9 Federal Whistleblower Protection and Nonprofit Organizations The First and Fourteenth Amendments to the United States Constitution offer limited protection for whistleblowers by prohibiting the government from retaliating against whistleblowers in the exercise of their free speech rights. However, with respect to nonprofit organizations, the Constitution does not prohibit private sector employers from retaliating against whistleblowers. Only statements of public concern are protected; these statements are balanced against the government's interest in maintaining the efficiency of its service. The first federal statute to include whistleblower protections was the National Labor Relations Act of That statute, and subsequent statutes, protects 8 Ibid. 9 Ibid.

3 Number 2 (Summer/Fall 2014) Missouri Policy Journal 3 only those individuals governed by the particular act, and whistleblowing activities are protected only insofar as they relate to the particular statutory purpose of the law. Most of the statutory whistleblower provisions, however, protect a broad range of whistleblowing activities. These activities include the reporting of violations, assisting in investigations, initiating proceedings, and providing testimony. Public and private employees are protected under these statutes. Federal whistleblower provisions typically provide certain remedies for retaliation. Whistleblowers employed by the federal government may file retaliation claims under the Civil Service Reform Act (CSRA), as amended by the Whistleblower Protection Act of 1989, which prohibits federal agencies from taking adverse personnel actions against civil servants in retaliation for whistleblowing. 10 The CSRA prohibits personnel actions in retaliation for disclosures of legal violations or gross mismanagement, a gross waste of funds, an abuse of authority, or a substantial and specific danger to public health or safety. 11 Although the CSRA protects a wide range of disclosures, it applies only to federal employees. The IRS Form 990, required to be completed by nonprofits, asks on line 13: Did the organization have written whistleblower policy? 12 The official instructions to Form 990 elaborate on the contents of an acceptable policy. The IRS Form 990 instructions further note that although the Sarbanes-Oxley Act of 2002 generally does not apply to nonprofits, it can impose criminal liability on nonprofits for (1) retaliation against whistleblowers that report federal offenses, and (2) destruction of records with the intent to obstruct a federal investigation. 13 The federal False Claims Act also may permit whistleblowers from nonprofit organizations to file lawsuits if they have evidence of a fraud perpetrated on the federal government and its programs. Additionally, the federal Panel on the Nonprofit Sector recommends that 10 Peter Poon, Legal Protections for the Scientific Misconduct of Whistleblowers, Journal of Law, Medicine, and Ethics 23 (March 1995): Ibid. 12 Jean Gordon Carter, Best Practices for Exempt Organizations and Form 990, Journal of Accountancy (September 2010). 13 Ibid. nonprofits voluntarily comply with all federal whistleblower protections, even if not specifically applicable to nonprofits. 14 Missouri and Other State Protections against Whistleblower Retaliation While the federal statutes are narrowly circumscribed by subject matter or applicability, state statutory and common law generally provide protections for a large number of state and private sector employees who report misconduct. Common law protection for whistleblowers is based upon the employment-at-will doctrine governing non-contractual, employeremployee relationships. Though this doctrine allows employers to terminate employees without reason, courts have created several exceptions to mitigate the negative impacts of this doctrine. Although a majority of states recognize the public policy exception, no clear consensus exists as to what constitutes protected public policy. Courts typically rule that the sources of public policy include legislation, administrative rules, regulations or decisions, and judicial decisions. Missouri whistleblower protection laws only cover state employees. 15 Under Missouri Revised Statutes , state agencies cannot take disciplinary action against an employee for disclosing alleged prohibited activity under investigation or for disclosing information which the employees reasonably believes to be a violation of law or rule, mismanagement, waste of funds, abuse of authority or a specific and substantial danger to public health or safety. 16 Protections do not apply if the employees know the disclosure to be false or if it was made in reckless disregard for the truth Guidestar. The Sarbanes-Oxley Act and Implications for Nonprofit Organizations, March Accessed October 5, Missouri Revised Statutes. Public Officers and Employees Miscellaneous Provisions, Chapter 105, Section August Ibid. 17 Ibid.

4 4 Missouri Policy Journal Number 2 (Summer/Fall 2014) At least one court has recognized that an employment termination in retaliation for whistleblowing constitutes a violation of public policy. In Palmateer v. International Harvester Co., an employee alleged that he was discharged in retaliation for supplying a law enforcement agency with information that criminally implicated a coworker. 18 The state supreme court ruled that the whistleblower stated a cause of action for retaliatory discharge under the public policy exception to the common law employment-at-will doctrine. Conceivably, the public policy exception could be broadened by judicial interpretation to protect allegations of civil offenses or even violations of professional codes of ethics. At least thirty-three states have general whistleblower statutes designed to protect employees who report suspected wrongdoing. 19 Analogous to the Federal Civil Service Reform Act, all state whistleblower statutes protect public employees. Of these statutes, less than half extend protection to private sector whistleblowers. 20 Some state statutes require the whistleblower to identify the particular statute he believes is being violated. 21 Others protect employees who disclose mismanagement, gross waste, abuse of authority, or threats to the public's health and safety. 22 A vast majority of state whistleblower statutes include a requirement that the whistleblower's allegation be made in good faith. 23 Good faith has been defined as an honest belief, the absence of malice and the absence of design to defraud or to seek an unconscionable advantage. Thus, a state statute with a good-faith requirement may not protect reckless, malicious, or confidential-by-law disclosures. Although a few states require the whistleblower to investigate personally the merits of his charge before disclosure, most statutes merely require a reasonable 18 Palmateer v. International Harvester Co (Illinois Supreme Court, April 17, 1981). 19 Gerard Sinzdak, An Analysis of Current Whistleblower Laws: Defending a More Flexible Approach to Reporting Requirements. California Law Review (December 2008). 20 Ibid. 21 Ibid. 22 Ibid. 23 National Conference of State Legislators. State Whistleblower Laws. November Accessed October 5, belief that the charges are accurate. 24 Thus, the allegation does not have to be correct. The statutes in about half of the states require the whistleblower to make his disclosure to an appropriate entity outside the employer, whether it be a government agency or other public body. 25 States typically require the whistleblower to report misconduct internally, to the employer. This policy allows employers the first opportunity to investigate and correct problems. In general, the statutes prohibit employers from taking adverse personnel actions or discharging, disciplining, or otherwise penalizing whistleblowers. State statutory law generally allows whistleblowers who suffer retaliation to file civil suits against their employers. Some states, however, require the whistleblower first to exhaust any administrative remedies, such as state grievance procedures. Whistleblowers must also file their retaliation complaints within the time period established by applicable statutes of limitations. State statutes of limitations are commonly ninety or 180 days after the alleged retaliatory action, compared to the thirty days usually allowed by federal statute. 26 Under most statutes, the whistleblower has the burden of persuasion to show retaliation. He must demonstrate that he has or was about to disclose suspected wrongdoing, and that adverse personnel consequences occurred as a result. If the employer articulates a legitimate reason for the adverse personnel action, the whistleblower must then demonstrate that the reason given is a pretext. Chavez-Lavagnino v. Motivation Education Training, Inc. A recent opinion by the Eighth Circuit Court of Appeals in Chavez-Lavagnino v. Motivation Education Training, Inc. (MET) may remind Missouri and other nonprofits that they are not only subject to whistleblower laws, but their actions will be 24 Ibid. 25 Ibid. 26 National Conference of State Legislators. State Whistleblower Laws. November Accessed October 5,

5 Number 2 (Summer/Fall 2014) Missouri Policy Journal 5 scrutinized in conjunction with their heightened responsibility to the community and governments that support them. In Chavez-Lavagnino, the plaintiffs brought an action against their employer, MET, who they alleged terminated them in violation of Minnesota law for refusing to participate in MET's attempts to defraud the federal government. 27 MET s defense included the following arguments: (1) MET did not direct the plaintiffs to violate federal law; (2) MET attempted to rehire one of the plaintiffs shortly after her termination; (3) plaintiffs could not prove their refusal to follow allegedly unlawful directions caused their terminations; and (4) plaintiffs supervisor could not be held personally liable for their firing. 28 The court found MET s unlawful directions to its employees inexcusable, despite its charitable intentions. 29 First, the court found that MET had allegedly directed its employees to forge signatures, shred tax forms, qualify ineligible workers, and falsify follow-up notes... so that MET could disburse Program funds to ineligible workers, falsely report to the government that MET was helping those workers succeed, and in turn receive more grant money. 30 Second, the court found that one plaintiff s having been fired temporarily and charged with release time until the firing [was] rescinded allowed her to bring a whistleblower claim. Third, the court found that the timing of the plaintiffs firings shortly after their refusal to engage in illegal activity showed that MET fired them because of their refusal. 31 This decision reminds nonprofits of their susceptibility to whistleblower claims. Nonprofits can protect themselves by instituting responsible accounting practices and independent audits, as well as avoiding conflicts of interest or the appearance of such conflicts. A carefully written governance plan should include guidance to help nonprofit organizations adopt, implement, and distribute a written whistleblower 27 Chavez-Lavagnino v. Motivation Education Training, Inc (United States Court of Appeals for the Eighth Circuit, August 25, 2014). 28 Ibid. 29 Ibid. 30 Ibid. 31 Ibid. policy to help prevent internal criticisms from leading to litigation. Developing Whistleblower Protection Policies in Nonprofit Organizations Whistleblower protection policies can be applied by Missouri nonprofit organizations seeking to provide good organizational governance and reduce the potential for fraudulent activity. 32 Basic governance begins with addressing internal and external legal issues impacting the business, and creating systems to address them. 33 A whistleblower policy encourages staff and volunteers who work for nonprofit organizations to come forward with credible information on illegal practices or violations of adopted policies of the organization, specifies that the organization will protect the individual from retaliation, and identifies those staff or board members or outside parties to whom such information can be reported. Nonprofits who embrace and implement internal controls can help strengthen an organization s effectiveness and better accomplish its goals. Ultimately, this type of governance will enable nonprofit organizations to have more positive impacts through their mission, programs, and activities. Whistleblower policies typically: Encourage employees with any good-faith concerns to voluntarily voice those concerns without fear of any negative consequences; Specify that the organization will not retaliate against, and will to the extent possible protect the confidentiality of individuals who make good-faith reports; Mandate that retaliation in the form of firing, demoting, suspending, harassing, or any other type of disparate treatment will not be tolerated; Provide a sufficiently detailed process for such reporting, including the names of the person(s) to be contacted with a concern; Offer, as a last step of the reporting and review process, review by the board of directors or an external third party to ensure independence from supervisors or 32 Tim V. Eaton, Whistleblowing and Good Governance, The CPA Journal (June 2007). 33 Ibid.

6 6 Missouri Policy Journal Number 2 (Summer/Fall 2014) management, and strengthen the credibility of the program without conflicts of interest; and Require that supervisors be trained on all aspects of the policy, and the importance of abiding by the policy, to ensure the protections and processes are both followed and respected. Provide employees several ways to report concerns including the option of raising a concern anonymously. Establish an ombudsperson program with a credible forum in which employees can raise concerns internally and have assurance that their concerns will be investigated and appropriately addressed, which provides an effective means of mitigating the risk of whistleblower-retaliation lawsuits and resolving employee concerns internally before the concerns are exposed in the media or in regulatory enforcement proceedings. Adopt a policy prohibiting retaliation where employers are put on notice that all forms of retaliation against whistleblowers, including harassment, termination, and blacklisting, will not be tolerated and will result in disciplinary action. Train managers and supervisors to understand that merely adopting a policy is not enough to prevent retaliation against whistleblowers. Instead, managers and supervisors should be educated about whistleblower protections and provided the tools to address employee concerns. Take disciplinary action against those who engage in retaliation, enforcing their anti-retaliation policies and monitor compliance with those policies. Conclusion Nonprofit organizations in Missouri should consider implementing whistleblower policies. A whistleblower policy and effective enforcement may significantly reduce fraudulent activity and send a message to stakeholders that the nonprofit organizations exercise good corporate governance. Just as public corporations answer to shareholders, nonprofit organizations must answer to the public regarding the stewardship of resources and decision-making that promotes good citizenship.