Similarly, each state has varying degrees of laws that protect whistleblowers from retaliation. For example, New Jersey's Conscientious Employee Protection Act (CEPA) prohibits employers from retaliating against employees who disclose, object to, or refuse to participate in actions that they reasonably believe are either illegal, fraudulent, or in violation of public policy. N.J. Stat. Ann. §§ 34:19-1 et seq. The New Jersey Supreme Court has described CEPA as the most far-reaching whistleblower law in the United States. Ballinger v. Del. River Port Auth., 800 A.2d 97 (N.J. 2002).
Nevertheless, CEPA—like most whistleblower protection laws—by its terms protects only "employees" from retaliatory conduct. In the wake of Enron, WorldCom, and the Bernard Madoff scandal, the question has become: who qualifies as an "employee"? Recent court decisions indicate a trend to extend whistleblower protection to individuals whom one might generally consider to be independent contractors, and not limit such protections to traditional "employees." This has been done through statutory interpretation as well as application of tests to factually determine whether an individual is an "employee" or an "independent contractor." This extension of whistleblower protection could lead to expanded areas of liability for employers who utilize independent contractors.
U.S. Supreme Court Protects Independent Contractor Whistleblowers
Federal whistleblower protection was extended and bolstered on March 4, 2014, by the United States Supreme Court. In Lawson v. FMR LLC, 134 S. Ct. 1158 (2014), the Court was asked to determine if the whistleblower protection contained in the Sarbanes-Oxley Act of 2002 (SOX), 15 U.S.C. §§ 7201 et seq., extended to employees of privately held contractors and subcontractors that perform work for public companies. In Lawson, individuals who worked for private companies that provided advisory services to a publicly held family of mutual funds raised concerns about allegedly inaccurate statements made in the mutual funds' draft SEC registration statements and were fired, allegedly in retaliation for raising those concerns. In a 6–3 decision, the Supreme Court found that SOX's whistleblower protection did, indeed, extend to those individuals, who were employees of privately held contractors and subcontractors performing work for public companies. In reaching its decision, the Court interpreted the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). 12 U.S.C. §§ 5301 et seq.
Dodd-Frank prohibits publicly traded companies from discharging or in any other manner discriminating against a whistleblower in the terms and conditions of employment that are protected under SOX. The pertinent portion of SOX provides: "No company . . . or any officer, employee, contractor, subcontractor or agent of such company . . . may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of [whistleblower activity]." 18 U.S.C. § 1514A(a).
Dodd-Frank itself does not define who qualifies as an employee. Therefore, the Court itself drew the parameters of the term "employee." The Court analyzed the intent of Congress, which enacted SOX to thwart another Enron debacle. Further, the Court explained that outside professionals, such as lawyers or accountants, typically are in the best position to report fraud and therefore fear retaliation for doing so. In the case of Enron, for example, the accounting firm Arthur Andersen was in that position. The Court therefore held that under the statutory language of SOX, contractors and subcontractors of publicly traded companies are protected from retaliation after "blowing the whistle." Lawson, 134 S. Ct. at 1171.
New Jersey Whistleblower Law Protects Independent Contractors
Similarly, the New Jersey Supreme Court held in 2007 that CEPA, the New Jersey whistleblower law, protected individuals under certain circumstances who might otherwise be classified as independent contractors from adverse employment action in retaliation for exposing an employer's criminal, fraudulent, or corrupt activities. D'Annunzio v. Prudential Ins. Co. of Am., 927 A.2d 113 (N.J. 2007). CEPA defined an "employee" as "any individual who performs services for and under the control and direction of an employer for wages or other remuneration." N.J. Stat. Ann. § 34:19-2(b). Thus, on its face, independent contractors were not protected by that provision.
Nevertheless, the D'Annunzio court held that the protections under CEPA extended to independent contractors who met certain conditions. The court explained that CEPA is "remedial social legislation" designed to protect and encourage whistleblowing and discourage retaliation against whistleblowers. D'Annunzio, 927 A.2d at 118. With this in mind, the court held that "labels can be illusory" and, therefore, CEPA's definition of an "employee" must be read expansively. The court found that application of the statute to nontraditional workers turned on three general factors: (1) the degree of employer control over the individual's work, (2) the worker's economic dependence on the work relationship, and (3) whether the work of the individual is a functionally integral part of the employer's business. The court then adopted a 12-factor test initially set out by the appellate division in Pukowsky v. Caruso, 711 A.2d 398 (N.J. Super. Ct. App. Div. 1998), to determine if an individual qualifies for CEPA protection.
Applying the Pukowsky test, which was developed in that case to determine whether an independent contractor was eligible for protection as an employee under another New Jersey employment statute, the Law Against Discrimination, an individual will qualify as an employee entitled to CEPA protection if:
- the employer controls the means and manner of performance;
- the occupation is one that an employer can be required to supervise;
- the worker has the skill set that matches what the employer normally seeks of its employees to perform a job;
- the worker is provided with equipment and a workplace by the employer;
- the worker is continuously providing service to the employer;
- the worker is paid directly by the employer;
- the worker is actually terminated by the employer;
- the worker gets annual leave;
- the worker is an integral part of the business of the employer;
- the worker accrues retirement benefits;
- the worker's Social Security tax is paid by employer; and
- the parties intend the relationship to be that of an employee-employer.
Thus, any individual who has become one of the "cogs" in an employer's enterprise might be considered an "employee" entitled to CEPA protection if that individual meets the elements of the Pukowsky test. D'Annunzio, 927 A.2d at 122–23. Given the economic realities of twenty-first century employment and the recognition of the importance of whistleblowers, it is not surprising that the New Jersey Supreme Court broadened the application of CEPA and extended its protections to individuals who might otherwise be considered independent contractors.
Employers now must be wary because New Jersey has expanded the pool of individuals who can potentially qualify for CEPA protection. Subsequent to D'Annunzio, courts in New Jersey routinely utilize the 12-factor test to determine whether CEPA protection should be afforded to individuals who may not otherwise be considered "employees" in the traditional sense.
The Trend to Expand Whistleblower Protection in Other States
In addition to New Jersey, courts in other states have begun to evaluate whether an individual is an employee or an independent contractor for purposes of determining whether that individual can seek protection under state whistleblower laws. See, e.g., Giera v. City of Belleville, No. 294959, 2012 WL 2335920 (Mich. Ct. App. June 19, 2012) (applying the economic realities test to determine if independent contractors qualify as "employees" warranting whistleblower protection). In addition, Delaware went as far as to amend its whistleblower anti-retaliation laws to specifically include independent contractors. Del. Code Ann. §§ 1701 et seq.
Practical Steps Employers Can Take to Limit Liability
Courts have broadened whistleblower protection laws to apply to both employees and independent contractors in order to encourage individuals to "blow the whistle" on employer misconduct. As a result, individuals who do so can seek comfort in the fact that they will be afforded protection from retaliation. On the other hand, there is now a greater risk of increased employer liability.
Employers should therefore take steps to minimize any likelihood of being subjected to whistleblower suits. First, employers should develop specific policies to effectively manage employee reporting of alleged misconduct, and the treatment of such reporting employees, including protection from retaliation. Whistleblowing policies should provide a guideline within which employers can respond to employees' concerns that employers committed any alleged wrongdoing. Employers should assign a managerial-level employee the responsibility for investigating all employee whistleblower complaints. Then, once a complaint is made, employers should do the follow three tasks:
- Determine if a disclosure relates to either past, current, or proposed conduct that may be improper.
- Determine if it is possible that the employee has reasonable grounds to believe that the alleged conduct has occurred.
- Advise the employee making the disclosure of the decision and permit an employee who may disagree with the decision time to provide additional information.
Second, the same process and procedures should apply to individuals who may be considered independent contractors utilized by the employer. Even more significantly, employers should make clear in their contracts with independent contractors that the employer does not control or direct the work performed by the independent contractor, and that the independent contractor is free to work for other individuals or companies at the same time. Similarly, employers should not treat their independent contractors the same way they treat employees in such areas as manner and method of payment for work performed; supervision of work; provision of a workplace and workplace equipment and tools; provision of benefits, such as insurance, vacation time, and other paid leave; and payment of Social Security and state disability taxes.
The key for employers is to institute such policies proactively and to educate their employees, as well as independent contractors with whom they do business, in order to avoid potential litigation. A key first step for employers is to consult experienced counsel to assess corporate governance and compliance and assist in the development and implementation of appropriate procedures that can minimize exposure to liability from potential whistleblowers.
Keywords: commercial, business, litigation, Affordable Care Act, CEPA, employer liability, independent contractor, whistleblower, Sarbanes Oxley, SOX, Dodd-Frank, retaliation