Employees are often reluctant to report suspected misconduct because they fear retaliation from those that are engaged in the misconduct. This often prevents companies from discovering employee-related fraud at its early stages. While employer surveillance can go a long way to discovering wrongdoing in the workplace, employees are in a better position to know what their colleagues are doing and employers should have mechanisms in place to encourage their employees to report wrongdoing. In a previous post, we referenced the recent $2 million alleged fraud by several York University employees. The University eventually became aware of the situation through a whistleblower, but by that time, it had been ongoing for over 7 years. This illustrates the importance of having transparent whistleblower protection policies that provide employees with a safe route for registering issues or complaints of wrongdoing within the company. Such protection policies will encourage early reporting to the employer and facilitate earlier discovery of wrongdoing thereby reducing the potential losses incurred. In addition, employees will be less likely to make the complaint externally, for example, directly to the media, if they know that their complaint will be taken seriously by the employer and properly investigated.
In the United States, there is fairly broad legal protection for whistleblowers. The Sarbanes Oxley Act imposes criminal sanctions on employers for retaliation against employees who inform law enforcement officials of corporate wrongdoing, as well as gives employees the right to initiate civil claims against their employers. In 2010, the United States enacted the Dodd-Frank Act which goes one step further by rewarding employees who blow the whistle on wrongdoing to the Securities Exchange Commission.
Although whistleblower protection law is sparse in Canada, there is a trend towards greater protection. For example, Transparency International Canada has recently called for Canada and its provinces to step up their whistleblower protection laws. While there is federal legislation protecting public sector employees and 6 provinces have public sector whistleblower laws, currently, whistleblower protection in the private sector is governed primarily by the Criminal Code. Section 425.1 prohibits employers from retaliating or threatening to retaliate against employees who provide information to law enforcement officials. Violating this section could lead to imprisonment up to 5 years. However, the scope of this provision is limited, as it only applies to employer wrongdoing that constitutes a criminal offence or is otherwise unlawful, and only protects employees who report to law enforcement officials. The Criminal Code does not protect employees who report wrongdoing such as misappropriation of funds internally within a company.
In Ontario, whistleblowers have some protection under the Occupational Health and Safety Act, Environmental Protection Act, and the Employment Standards Act, but this protection is limited to employees who raise issues or concerns of wrongdoing that are specific violations under those respective pieces of legislation and not general wrongdoing. In addition, under the Employment Standards Act, the protection is limited to situations where the employee brings the complaint to the Ministry of Labour or an employment standards officer. As such, even under the Employment Standards Act, whistleblowing on fraud occurring within the company would not be protected.
Although there have not been many cases in Canada that have considered whistleblower protection, courts and other adjudicators clearly recognize the importance of the competing interests of an employee’s duty of fidelity and loyalty and the need for early reporting of wrongdoing. In Anderson v. IMTT-Quebec Inc., a decision released last year, the Federal Court of Appeal supported the principle that employees must exhaust internal whistleblowing mechanisms before going public. In coming to their decision, the Federal Court of Appeal considered the words of Justice Binnie in the Supreme Court of Canada case of Merk v. International Association of Bridge, Structural, Ornamental and Reinforcing Iron Workers, Local 771 at paras. 25-26: that the failure of employees to try and resolve such matters internally qualifies as disloyal and inappropriate conduct. Having a robust and transparent internal whistleblower protection policy will therefore protect the employer both in terms of early discovery of wrongdoing by its employees and in justifying taking disciplinary action against employees who breach confidentiality obligations and their duty of loyalty.