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Adverse Action: More Expansively Construed Under SOX than under Title VII

In a case of first impression, the Department of Labor’s Administrative Review Board (ARB) finds that the meaning of the term “adverse action” under the whistleblower protection provisions of the Sarbanes-Oxley Act (SOX) is substantially broader than the meaning of the same term under Title VII, and found that the employer’s disclosure of the whistleblower’s identity in violation of the employer’s own confidentiality policy was an adverse action.  This employee-friendly decision reflects the DOL trend towards expanding employees’ workplace rights.

First, the background.

Halliburton, Inc., one of the world’s largest providers of products and services to the energy industry, hired Anthony Menendez as Director of Technical Accounting Research & Training. His duties included monitoring and researching technical accounting issues and training Halliburton accountants.  He reported to Halliburton’s Chief Accounting Officer.

Shortly after he was hired, Mr. Menendez raised concerns about Halliburton’s revenue recognition practices, stating that he believed them to be improper under the Security and Exchange Commission’s Standard Accounting Bulletin (SAB)-104 and generally accepted accounting principles (GAAP). Halliburton and its accounting firm, KPMG, looked into Menendez’s concerns and concluded they were without merit.  Still believing he was right, and that Halliburton and KPMG were wrong, Menendez filed a confidential complaint with the SEC.  Thereafter, Menendez sent an e-mail to Halliburton’s Audit Committee making a similar complaint.  Based on Halliburton’s code of business conduct, the Audit Committee’s complaint procedures, and SOX, he expected his identity would be kept confidential.

It was not.  Mr. Menendez complaint- with his name attached- was forwarded to Halliburton’s General Counsel, Assistant General Counsel, Chief Financial Officer, Vice President for Investor Relations, and KPMG.

Days later, the SEC notified Halliburton that it was opening an investigation and directed it to suspend its normal document retention policy and to retain all documents and information pertaining to certain specified accounting practices.  That same day, Halliburton’s General Counsel sent a document retention notice to a number of company management officials and to Mr. Menendez’s co-workers in the finance and accounting department, connecting Mr. Menendez with the SEC investigation.

In the following weeks, Menendez received few phone calls or emails, and his co-workers generally avoided him.  KPMG auditors, with whom he normally worked closely, refused to interact with him.  Mr. Menendez requested, and was granted, paid administrative leave.  While Mr. Menendez was on leave, the SEC conducted and concluded its investigation, and formally notified Halliburton that it would not take enforcement action against it.  Halliburton directed Mr. Menendez to return to work, stating that he would return to the same position he had left, except that he would now report to the director of external reporting rather than to the Chief Accounting Officer.

Rather than returning to work, Mr. Menendez resigned and filed a complaint under the whistleblower protection provision of SOX.  A Department of Labor Administrative Law Judge found that Mr. Menendez engaged in SOX-protected activity but dismissed his complaint, holding that he failed to prove that Halliburton subjected him to retaliatory adverse action by, among other things, identifying him as the source of the complaints.  On appeal, the ARB overturned the ALJ’s conclusion that Halliburton’s breach of Menendez’s confidentiality with regard to his complaints was not an adverse action.

Under Title VII and relevant Supreme Court decisions, an “adverse action” is one where there is a tangible and “significant change in employment status, such as hiring, firing, failing to promote, reassignment with significantly different responsibilities, or a decision causing a significant change in benefits.”   Under the Title VII standard, it is unlikely that the disclosure of Mr. Menendez’s identity would be considered an “adverse action.” Reviewing the specific language of the SOX whistleblower provision and comparing it with the anti-retaliation provisions under Title VII, however, the ARB found that the term “adverse action” SOX “must be more expansively construed than under Title VII” and may include intangible actions.  Under this standard, Halliburton’s breach of Mr. Menendez’s right of confidentiality was an adverse action.  The ARB remanded the case to the ALJ, for it to determine whether Mr. Menendez’s complaints contributed to Halliburton’s decision to disclose his identity.

Employers beware.

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Martha Zackin