A phrase first coined in 2005, environmental, social, and corporate governance (“ESG”) is making headlines.   ESG is a lens applied by investors to evaluate the extent to which corporations function with respect to a variety of pro-social goals.  The term “ESG” is often used interchangeably with terms like “sustainable investing” or “socially responsible investing.”  Both institutional and individual investors have been vocal about the importance of these principles in investment decisions, as well as their interest in increased transparency over a variety of non-financial metrics.

Recently, the Securities and Exchange Commission (SEC) has indicated its intent to flex its rulemaking muscle to standardize ESG metrics that, under past administrations, had been voluntary.  These proposed rule changes could drastically increase the level of required transparency for management and board rooms of publicly traded companies.

While past administrations have taken a hands-off approach towards regulating ESG disclosure, the current SEC has announced an intent to incorporate ESG metrics into a regulatory framework for all publicly traded companies to standardize what otherwise have been varied data reporting.

On March 21, 2022, the SEC proposed rules regarding the “E” category of ESG that may inform what employers can expect to be instituted on the other categories.  The proposed rule changes would require corporations registered with the SEC to disclose information about greenhouse gas emissions, as well as the corporation’s identification of exogenous climate related risks (such as severe weather and rising temperatures), their risk management strategies, and the predicted impact such climate events could have on their bottom line.[1]

With this increased structure put in place for climate-related disclosure, publicly traded companies are wondering if more detailed disclosures on their social and governance metrics are next.  Publicly traded companies are already required to provide information regarding “human capital” on their form 10-K reports, without a standardized disclosure requirement. The SEC directed corporations to describe their human capital resources in their 10-Ks “to the extent material to the understanding of that registrant’s business taken as a whole,” including any measures “that address the development, attraction and retention of personnel.”  A survey from Financial Executives International surveyed the 10-K reports of 150 companies from the S&P 500, and determined that these human capital disclosures ranged from a single paragraph to three full pages, and that there was little uniformity in what information was included.[2] While some corporations chose to include information like metrics regarding gender pay equity and diversity, equity, and inclusion initiatives, others focused on metrics like COVID-19 relief, remote work availability, and employee benefits. Without standardized requirements, corporations could include as much or as little data as they want.

SEC leadership has suggested that the agency could eventually require information on employee compensation, benefits, safety, and even workforce demographics as part of human capital disclosures.  With new rulemaking on the horizon, publicly traded companies will be keeping an eye on exactly what statistics they will be required to provide, and how their disclosures will impact the perception of shareholders.

In future blog posts, Jackson Lewis will provide other insight into ESG and potential requirements.

 

[1] https://www.sec.gov/news/press-release/2022-46

[2] https://www.financialexecutives.org/FEI-Daily/May-2021/The-SEC%E2%80%99s-New-Human-Capital-Disclosures-Year-1.aspx

On April 6, 2022, Minnesota’s Supreme Court in Lori Dowling Hanson v. State of Minnesota, Department of Natural Resources affirmed the lower courts’ summary dismissal of a Minnesota Whistleblower Act (“MWA”) claim brought by a former Department of Natural Resources (“DNR”) employee Lori Dowling Hanson (“Hanson”). The case left unanswered the fate of McDonnell Douglas in MWA claims.

On August 14, 2017, Hanson, a DNR regional director, attended a work-related conference, staying at a hotel on an Indian Reservation in her region. At times during the day, she heard a crying baby in a neighboring hotel room and became concerned. Hanson reported her concern to the hotel. Shortly after, she talked to two men in the hallway who she believed were “johns or pimps.”

Hotel security arrived, calling 911 to report Hanson’s concerns. As an officer from the Bureau of Indian Affairs (“BIA”) was dispatched to the hotel, hotel security entered the neighboring room and talked to its occupants—a woman, three children, and a teething infant. Hotel security confirmed the room occupants were safe and secure.

Hanson insisted on talking with law enforcement and called 911 herself. She identified herself as a “state official,” asked for “safe escort,” and stated she was “barricaded” inside because she “stumbled upon” a prostitution ring. She demanded state law enforcement, not BIA, respond to the hotel to provide her a “safe exit.”

Thereafter, hotel management asked Hanson to leave. She became angry, refused to leave, and asked for a DNR conservation officer to respond to the hotel. She then called a high-ranking DNR official and reported she suspected child neglect and a prostitution ring were occurring at the hotel. The DNR official sent over a conservation officer. With the assistance of state law enforcement, Hanson left the hotel.

On September 25, 2017, following paid investigatory leave, the DNR terminated Hanson for her conduct during her report of suspected illegal activity, not because of her report. She sued alleging a MWA violation.

The Minnesota Court of Appeals upheld the trial court’s summary judgment in favor of the DNR. The Minnesota Supreme Court, utilizing McDonnell Douglas, held Hanson did not provide evidence that her report of suspected child neglect and a prostitution ring motivated the termination decision. The Court held the record demonstrated the DNR terminated Hanson because of her conduct during her report, not her report itself. The Court reasoned her conduct constituted an intervening event that severed any reasonable inference of a temporal connection between the alleged protected activity and termination.

Having a potentially broader impact, the Court declined to address whether Minnesota should abandon the McDonnell Douglas framework in MWA cases. As part of her appeal, Hanson asked the Court to replace McDonnell Douglas with a standard derived from model jury instructions “that focuses on whether the whistleblowing activity ‘was a motivating factor’ or ‘played a part’ in the adverse employment action.” The Court declined, holding the outcome was the same under either standard.

In a first of its kind, a concurring opinion held Minnesota should replace McDonnell Douglas in MWA cases with the Rule 56 standard. The concurring opinion reasoned McDonnell Douglas should be abandoned because it is cumbersome and obsolete, and the Court never previously analyzed whether it was the proper test in MWA cases.

At the onset of COVID in 2020, the Wall Street Journal reported that over a three-month period, there were a deluge of tips, complaints and possible referrals to the U.S. Securities and Exchange Commission (“SEC”). More recently, the SEC has reported record whistleblower awards. And although the extent to which remote work has contributed to these statistics can be debated, these trends and the continued popularity of remote work create an opportunity for employers to reassess internal reporting processes and their compliance culture.

Employers should have effective and accessible reporting mechanisms, including anonymous reporting, so that remote employees can report concerns of every kind. Factors to consider include:

  • Adequate staffing and resources to handle complaints received in a prompt and adequate manner, including documentation of the complaint, response, and closure;
  • Ensuring follow up with complaining employees to ensure reporters understand their concerns have been reviewed and addressed;
  • Reviewing codes of conduct to ensure consideration of the remote work environment;
  • Top-down messaging about important compliance values;
  • Reviewing business practices to evaluate compliance gaps and opportunities for misconduct created by remote and hybrid work; and
  • Ensuring investigations can be conducted virtually as needed with appropriate privacy and confidentiality safeguards in place.

Employers should also create a culture of trust so individuals will report concerns. A low volume of internal reporting may indicate a lack of trust, while a high volume may indicate a healthier compliance culture.

Creating a culture of trust may be a particular challenge for some companies as they re-engage with workers who have been virtual for two years since the outset of the pandemic. Strategies include:

  • Providing more information to employees about key company events, including financial condition, to create a greater sense of security in or awareness about their positions. Transparency breeds trust.
  • Ensuring that remote employees are not feeling intimidated. Communication styles have changed. Employees may feel uncomfortable, for example, when managers hold one-sided meetings, e., only the employee is on camera and/or the frequency of employee/manager communications may have changed. Tweaks in management style in this “new” environment may be required to build and maintain trust.

In sum, a prudent employer keeps a pulse on the challenges of the remote work environment by re-assessing the effectiveness of its reporting process and evaluating its culture. A smart employer then takes positive action.

On September 30, 2020, Governor Newsom signed Assembly Bill (AB) 979, which required publicly held corporations headquartered in California to diversify their boards of directors with directors from “underrepresented communities” by December 31, 2021. AB 979 followed similar legislation in Senate Bill (SB) 826, which required gender diversity on boards of directors. Read more here.

Building on board gender diversity requirements, California passed Assembly Bill (AB) 979 in 2020.  This statute requires publicly held corporations headquartered in California to diversify their boards of directors with directors from “underrepresented communities,” specifically those individuals who self-identify as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or who self-identifies as gay, lesbian, bisexual, or transgender. AB 979 required boards to diversify by December 31, 2021.

Starting this year in March, the California Secretary of State will publish annual reports on its website documenting compliance with these diversification requirements. Companies that fail to timely comply will be fined $100,000 for the first violation and $300,000 for subsequent violations.

AB 979 has faced several legal challenges, similar to Senate Bill (SB) 826, which required gender diversity on boards of directors. The State of California is currently defending four different actions involving these bills. Crest v. Padilla I (Crest I) is a taxpayer lawsuit challenging the use of state taxes to enforce the requirements under SB 826. Crest I is currently pending a verdict in the trial court. A taxpayer challenge to AB 979 was brought by the same parties (Crest v. Padilla II) and is scheduled for trial in May of this year.

Meland v. Weber is an action seeking to enjoin enforcement of SB 826 is pending appeal in the 9th circuit after a denial of a preliminary injunction in that action.

And finally, an action was brought by Alliance for Fair Board Recruitment against the California Secretary of State challenging both SB 826 and AB 979 on equal protection grounds. The State of California recently filed a motion to stay the action pending outcomes of the trials in Crest I and II and the appeal in Meland.

If you have questions regarding compliance with AB 979 or SB 826 or related issues regarding corporate compliance, contact a Jackson Lewis attorney to discuss.

The U.S. Supreme Court has declined to settle a split among federal appeal courts on whether former employees are covered by whistleblower anti-retaliation protections contained in the False Claims Act (FCA). United States ex rel. David Felten v. William Beaumont Hosp., 993 F.3d 428 (6th Cir. 2021), cert. denied, No. 21-443 (U.S. Jan. 24, 2022).

Sixth Circuit Decision

In March 2021, the U.S. Court of Appeals for the Sixth Circuit ruled on the case of David Felten. Felten sued William Beaumont Hospital in 2010 for allegedly paying kickbacks to doctors for referrals. Felten later amended the lawsuit to claim the hospital retaliated against him by preventing him from getting another job after he was terminated. The Sixth Circuit vacated a ruling from the U.S. District Court for the Eastern District of Michigan and held the federal False Claims Act’s anti-retaliation provision protects former employees alleging post-termination retaliation. See United States ex rel. Felten v. William Beaumont Hosp., No. 20-1002, 2021 U.S. App. LEXIS 9387 (6th Cir. Mar. 31, 2021).

The Sixth Circuit reasoned that the purpose of the statute is to encourage the reporting of fraud and facilitate the government’s ability to stymie crime by protecting those who report it. It stated, “If employers can simply threaten, harass and discriminate against employees without repercussion as long as they fire them first, potential whistleblowers could be dissuaded from reporting fraud against the government.”

Sixth Circuit and Tenth Circuit Split

The Sixth Circuit’s March 2021 decision created a split with the Tenth Circuit, which has held the FCA does not shield former employees from retaliation. In Potts v. Center for Excellence in Higher Education, Inc., 908 F.3d 610 (10th Cir. 2018), the plaintiff, a campus director at an educational organization, allegedly resigned from the organization because she thought the organization had deceived its accreditor to maintain its accreditation. She entered into an agreement with the organization, however, providing that she would not disparage or file complaints against the organization in the future. When she nevertheless reported the organization to its accreditor, the organization sued her for breach of contract. Plaintiff, in turn, filed suit, alleging that the organization retaliated against her in violation of the FCA. The organization moved to dismiss plaintiff’s FCA lawsuit, which the district court granted.

The Tenth Circuit affirmed dismissal of plaintiff’s FCA claim. It stated, “We conclude that the False Claims Act’s anti-retaliation provision unambiguously excludes relief for retaliatory acts occurring after the employee has left employment.”

Potential Resolution from Congress?

In July 2021, a bipartisan group of senators introduced the False Claims Amendments Act of 2021 (S.2428). The proposed amendment would clarify that the FCA’s existing anti-retaliation provision applies in the post-employment retaliation context. Examples of post-employment retaliation might include blacklisting a whistleblower or bringing a retaliatory lawsuit against the whistleblower to pressure the whistleblower to drop the qui tam FCA suit.

In October, the Senate Judiciary Committee voted to send the bill to the full Senate for consideration. In November, the bill was moved to the full Senate, but it remains unclear if the bill will receive a vote on the Senate floor.

What Employers Should Do Now?

Since the U.S. Supreme Court has currently declined to resolve the Circuit split, employers should remain cautious that negative statements about a former employee may potentially give rise to potential liability under the FCA (outside of the Tenth Circuit). As a result, employers should train managers and human resources professionals on proper communications about a former employee’s performance and separation, and should consult with counsel about the content of such communications in high-risk situations.

In the last ten years alone, SCOTUS and Circuit Courts have shaped the way employers craft and use arbitration agreements with their workforce, and the trend shows no sign of slowing down. In the last few months, recent court decisions have reinforced the notion that employers must always be vigilant and review their agreements to ensure they cover possible claims brought by their employees, including potential whistleblower claims.

Two cases from the Fifth Circuit Court of Appeals underscore the importance of careful drafting of arbitration agreements: Robertson v. Intratek Comput., Inc. and Henry Schein Inc. v. Archer and White Sales Inc.

In Robertson, the Fifth Circuit upheld the decision from the District Court for the Western District of Texas to compel arbitration of the plaintiff’s federal whistleblower claim under 41 U.S.C.S. § 4712, but found that the District Court erred in compelling arbitration of certain claims not covered by the agreement. In particular, the statutory text of § 4712 does not override the presumption of arbitrability afforded by the Federal Arbitration Act, and the arbitration agreement clearly covered claims under “any federal . . . law.” However, the plaintiff could not be compelled to arbitrate his claims against a Veterans’ Administration Official who was not a party to the agreement.

Henry Schein Inc. v. Archer and White Sales Inc., a case which had previously been before SCOTUS, was recently dismissed by SCOTUS, finding that the writ was “improvidently granted.” For employers, this means that the most recent decision from the 5th Circuit Court of Appeals which found that the delegation clause in the arbitration agreement failed to demonstrate a “clear and unmistakable” intent for an arbitrator to decide whether a particular claim is to be arbitrated, still stands.

For now, the key takeaway for employers is two-fold—to update arbitration agreements to ensure that language is clear when delegating dispute about the arbitrability of a particular claim, including appropriate whistleblower claims, to an arbitrator, and to determine whether there are any claims which the employer prefers to be heard by the court.

Please contact a Jackson Lewis attorney if you have any questions about these decisions or how to draft arbitration agreements for use with your employees.

©2022 Jackson Lewis P.C. This material is provided for informational purposes only. It is not intended to constitute legal advice nor does it create a client-lawyer relationship between Jackson Lewis and any recipient. Recipients should consult with counsel before taking any actions based on the information contained within this material. This material may be considered attorney advertising in some jurisdictions. Prior results do not guarantee a similar outcome.

Focused on labor and employment law since 1958, Jackson Lewis P.C.’s 950+ attorneys located in major cities nationwide consistently identify and respond to new ways workplace law intersects business. We help employers develop proactive strategies, strong policies and business-oriented solutions to cultivate high-functioning workforces that are engaged, stable and diverse, and share our clients’ goals to emphasize inclusivity and respect for the contribution of every employee. For more information, visit https://www.jacksonlewis.com.

That an employee may have engaged in protected activity under The Sarbanes-Oxley Act (“SOX”) does not render their employer unable to address the employee’s subsequent misconduct or other inappropriate behavior. Employers retain the ability to take adverse employment action for legitimate reasons unrelated to an employee’s arguably protected activity under SOX. Mere protected activity, by itself, does not insulate an employee from the legitimate consequences of their misconduct that would not be tolerated from other employees.

For example, SOX protects whistle-blowers of publicly-traded companies against retaliation by their employers for providing information about potentially illegal conduct. But, as part of a prima facie case, SOX requires a showing, by a preponderance of the evidence, that the employee’s protected activity “was a contributing factor” in the employer’s unfavorable personnel action. See 29 C.F.R. § 1980.109(a).  The passage of a significant amount of time or some legitimate intervening event between the protected activity and the adverse employment action are commonly recognized factors that refute an inference of causal connection between a termination, for example, and the purported protected activity.

While each case turns on its own set of facts, and in some instances how other employees have been similarly treated, employers can review with legal counsel their decisional risks to address any concerns over how to handle ongoing employee misconduct or inappropriate behavior.  For example, long-past protected activities of a high-level executive in tandem with a “lengthy history of antagonism and intervening events” which caused the Board of Directors to view the executive as insubordinate, was found to be a lawful termination.  Feldman v. Law Enforcement Assocs. Corp., 752 F.3d 339 (4th Cir. 2014).   Otherwise, the “contributing factor” test of SOX “simply would be toothless.” (Id.)  Leak v. Dominion Resources Services, Inc., ARB Nos. 07-043 and 07-051 ARB May 29, 2009) (affirming ALJ’s decision that employee’s “own behavior…short-circuited the meeting and precipitated his ultimate termination.”).  An employee who engages in protected “whistle-blowing” activity under SOX can nonetheless be lawfully terminated for “swallow[ing] his whistle and decid[ing] not to cooperate with [his employer] in investigating his concerns.” Grove v. EMC Corp., 2006-SOX-99 (ALJ July 2, 2007).  Having engaged in protected activity under SOX does not entitle an employee to “asylum” providing him with “absolute insulation from any adverse employment consequences.” A “whistle-blower” cannot unilaterally stop performing his job, or dictate the ground rules for his employer’s investigation of the issues he has raised, or refuse to cooperate if his terms are not met. Id.

While employers must be mindful of their legal obligations once an employee has engaged in protected activity under SOX, employers also have the right to expect their employees will not engage in improper conduct thereafter. An employee who “blows the whistle” is not shielded from the legitimate consequences an employer may take if the employee were to fail to cooperate in their employer’s investigation or engage in misconduct or other inappropriate behavior.

Please contact a Jackson Lewis attorney, including in our Corporate Governance and Internal Investigations practice group, with questions regarding advice and best practices in this expanding area.

The most powerful leadership tool you have is your own personal example.”  John Wooden

Boards play a pivotal role in establishing an organization that champions, highlights, and capitalizes on diversity, inclusion and equity. Boards must be mindful of how they present themselves. The growing climate of intolerance that has come to light over the last few years has made it clear that there is a leadership imperative to face the issues of inequities within the communities served. Divisions among economic, racial, religious, and political lines have created an increasingly polarized populace in need of reinvigoration. Thorny issues and tumultuous undercurrents at the intersection of matters implicating race, gender, and sexuality call for profound reflection as we seek to understand one another.

Board leadership on this point matters. Boards can expand intentionally  their thinking on this point with training. While  increased diversity on boards is an important goal and furthers the ability of a board to address these increasing challenges, the reality is that many companies are struggling to make progress in that regard. Even if board diversity requirements are not currently mandated yet (as in California and Washington), diversity, inclusion and equity training can help board leaders and executives become more culturally competent, empathetic, and self-aware. For these reasons board diversity and inclusion training should be a top priority.

Responsible board members spend time working diligently to understand both historical and current disparities, injustices, and inequities in order to strive for continuous improvement. Participating in diversity, inclusion, and equity training and engaging in open discussions about implicit bias can give board members insight in helping organizations understand the context in which they work and how to best prioritize resources and strategies based on these realities. Awareness of systemic inequities can enable a board to develop the mental muscle to help the organization served avoid and overcome blind spots that produce  flawed strategies and, instead, create powerful opportunities to deepen the organization’s impact, relevance, and advancement.

In 2021, 78% of newly elected board directors were white. As an initial matter, boards take many approaches to assembling a diverse and inclusive group of directors. Training can eradicate the myth that there are not enough qualified diverse candidates to fill board seats. To diversify board members, board searches must diversify the search for candidates. This may require movement beyond the traditional practice of board recruitment, such as looking within the inner circles of those currently on the board. Casting a wider net, expanding the search to include not-for-profit or government candidates as prospective for-profit corporate board members, looking at MBA programs, executive leadership programs, and professional associations, and academic executives from local colleges and universities, can help a board tap into varied perspectives, identities, and life experiences that might prove to be a welcomed and celebrated addition to a board.

Tracking and measuring diversity, inclusion and equity efforts with an action plan can help maintain focus on achieving goals. Assigning this work to a board committee with planning and oversight responsibility can be very effective.  An extended commitment to diversity, equity, and inclusion is key, as this work is not accomplished through a one-session training. Accountability reviews can help a board stay the course on this front.

Diversity brings value. The effort is worthwhile, as decisions reached from a diverse group are more likely to be superior to those from homogeneous groups. At the end of the day, boards need diversity of thought.

With so much happening during the holidays, who wants to think about preventive steps and corporate compliance? Unfortunately, expansion of New York’s “whistleblower protection” laws coupled with the ongoing pandemic-related return to work issues make it increasingly critical for employers to ring in the New Year with an understanding of these new developments. High on the list of to do’s should be creating an effective “whistleblower” program, that includes an internal reporting process for employees as well as, in some instances, for independent contractors.

Recently, for example, New York Governor Hochul signed legislation expanding coverage of Labor Law 740, a whistleblower law, by including employees as well as former employees and independent contractors. This law goes into effect on January 26, 2022. The “old” law provides protection from retaliation to employees who: 1) disclose or threaten to disclose to a supervisor or a public body an activity, policy or practice of the employer that violates a law, rule or regulation or creates a danger to public health and safety; 2) provide information to or testify before any public body conducting an investigation, inquiry into the employer’s violation; or 3) object to or refuse to participate in the activity or policy that violate the law. The new legislation expands protection to individuals “who report or threaten to report any activity that they reasonably believe is in violation of law, rule or regulation.” The amendments further clarify the definition of “law, rule or regulation” includes any state, local, and federal law, rule, and regulation, as well as any judicial and administrative decisions.

If a person intends on providing information to a public body, the amendments only require that the individual “in good faith reasonably believes” the activity has or will occur, and that the person “in good faith reasonably believes” the activity is an illegal business activity. Notably, there is no requirement that the person provide notice to the employer. This is a different standard of what may constitute protected activity under the current statute.

The changes to the law provide broader protections, including an expanded definition of retaliatory action, a longer statute of limitations, entitlement to jury trials and additional remedies. In addition, the law requires employers to inform employees of these rights and protections by way of a so-called “Section 740 Notice,” that is placed in a “well-lighted” and easily accessible area frequently populated by employees. https://www.litigatorsatwork.com/2021/12/employee-whistleblower-protections-expanded-under-new-york-labor-law-section-740/. Given these developments, employers should consider what strategies need to be implemented in 2022 to minimize risk and litigation.

To begin preparing for the expanded remedies available under whistleblower protection laws that are comparable to New York’s, we recommend that employers review and consider updating the company’s “internal reporting” policy. Beyond that, we recommend employers review, bolster, and/or develop the key elements of their effective “whistleblower” program which are:

  • Top Leadership Commitment and Support
  • Management Responsiveness
  • Internal Reporting System, With Alternative Systems
  • If appropriate, External Reporting System
  • Training on the Process
  • Assurance of No Retaliation to persons who make reports
  • Regular Audit or Review of Process To Determine Effectiveness
  • Continuous improvement and development of a Culture of Trust and Compliance

As you can see, even with the pandemic on everyone’s mind — updating or creating an effective “whistleblower” program is an important New Year resolution. On that note, best wishes for a happy and healthy New Year!

Please contact a Jackson Lewis attorney, including attorneys in our Corporate Governance and Internal Investigations practice group, with questions regarding legal developments and best practices in this expanding area.