Employment Law Update
ALJ Awards Front Pay to SOX Whistleblower Who Rejected Reinstatement
A Department of Labor administrative law judge (“ALJ”) awarded more than $640,000 in front pay to a California banker who rejected reinstatement after a Department of Labor (“DOL”) investigation found her employer violated the whistleblower provision of the Sarbanes-Oxley Act of 2002 (the “Act” or “SOX”). Hagman v. ashington Mut. Bank Inc., DOL ALJ, 2005-SOX-00073 (Dec. 19, 2006). This is the first time a successful SOX complainant received front pay in lieu of reinstatement.
The Act protects employees of public companies who report conduct they reasonably believe constitutes a violation of federal law relating to financial, securities or shareholder fraud. The Act’s regulations provide not only
The ALJ in Hagman ruled that the claimant reasonably rejected the bank’s reinstatement offer, which was made after the DOL investigator ordered reinstatement based on the finding of a SOX violation, because of the manifest hostility between the parties and held that front pay should be awarded instead.
that an ALJ may order reinstatement of the complainant to his or her former position, but also that any such order may not be stayed pending an appeal to the Administrative Review Board. 20 C.F.R. § 1980.109(c). Notably missing from the regulations is any provision explicitly allowing an employer to pay the complainant (even for only the time an appeal is pending) in lieu of reinstatement.
Nonetheless, the ALJ in Hagman ruled that the claimant reasonably rejected the bank’s reinstatement offer, which was made after the DOL investigator ordered reinstatement based on the finding of a SOX violation, because of the manifest hostility between the parties and held that front pay should be awarded instead. The ALJ cited to the Act’s general language in the section on remedies, which provides that “[a]n employee prevailing in any action under subsection (b)(1) shall be entitled to all relief necessary to make the employee whole.” 18 U.S.C. § 1514A(c)(1).
The ALJ found that Hagman’s rejection of the reinstatement offer was “objectively reasonable based on the hostility exhibited toward Complainant by Respondent’s managers and the likelihood of a dysfunctional work environment upon reinstatement.” The ALJ pointed to three reasons in support of his finding: (1) at the time the bank offered reinstatement, the harasser who had acted abusively toward Hagman was still employed by the bank and Hagman would have had to interact with him as part of her job; (2) the bank’s managers continued to assert throughout the DOL investigation and, importantly, after the DOL’s findings of harassment, that Hagman was terminated due to poor performance and restructuring, and its failure to incorporate its admitted retaliation into new guidelines or policies to prevent future retaliatory conduct demonstrated hostility toward Hagman; and (3) despite repeated, explicit pleas from Hagman for protection from retaliation, none of the bank’s managers provided relief to Hagman; instead, they moved the harasser to a position of immediate supervision over Hagman. Under these circumstances, the ALJ found that the Complainant reasonably lacked trust in the employer and its managers and her return to the bank would “guarantee a dysfunctional, unproductive working relationship.”
In addition to the front pay, Hagman was awarded approximately $300,000 in attorneys’ fees and $125,000 in deferred compensation. The bank has filed a petition with the DOL seeking review of the ALJ’s decision.
The decision demonstrates the DOL’s broad powers to award front pay in lieu of reinstatement at the whistleblower’s request where reinstatement is inappropriate. The opinion also highlights the importance of taking swift action when confronted with complaints of wrongdoing and retaliation under SOX. If, following the DOL’s finding of retaliation and the bank’s acceptance of that finding, the bank’s managers had disciplined the harasser and enacted policies to prevent future retaliatory conduct, it is questionable whether the DOL would have awarded front pay in lieu of reinstatement. The decision in Hagman does not, however, alter an employer’s responsibility to reinstate a whistleblower immediately following a reinstatement order by an ALJ. ■
Kramer Levin Naftalis & Frankel LLP