Reporting Fraud

Reporting Fraud: An Exception to the At-Will Termination Rule

Texas follows the majority rule of at-will terminations. However, terminating a whistleblower for reporting fraud can breach both state and federal laws designed to protect whistleblowers.

While we previously have written on the subject of whistleblowers, today we provide a more in-depth discussion of the topic.

What is the At-Will Termination Rule?

We start with the basic rule of at-will employment and then seek to find a legal exception to that rule.  Texas, like most states, recognizes the general rule of at-will employment. According to Cornell Law, at-will employment “refers to an employment agreement stating that employment is for an indefinite period of time and may be terminated either by employer or employee.” This means that under at-will employment, either the employee or employer can end the employment relationship at any moment without citing a specific reason.  No prior notice is required.  An employer can fire employees without  “cause.”

Essentially, the at-will employment rule affords both employers and employees a considerable amount of freedom. Flexibility in work arrangements enables employers to change an employee’s terms or conditions as they see fit, provided the employer gives notice of the change beforehand.  While employees are free to switch jobs at their discretion if dissatisfied with their current role, the at-will rule seems to favor employers.  When an employee quits, usually the company can easily replace that person.   However, when an employee learns that he or she has been abruptly terminated, suddenly the employee has no work, no income, and no insurance coverage.

Even under the at-will rule, an employer cannot terminate an employee for an unlawful reason.  For example, an employer cannot terminate an employee because of the employee’s race, color, gender or sex, national origin, disability, or age.  Such a termination would be unlawful because the reason violates the laws prohibiting discrimination at work.  Additionally, retaliatory dismissals – such as firing employees for asserting their rights under labor laws, reporting fraud, or whistleblower protections – are prohibited.

Are Whistleblowers’ Jobs Protected?

Federal laws protect whistleblowers.  Whistleblowing involves an employee exposing illicit or unethical practices within their organization. However, the remedy for a whistleblower usually comes in the form of damages after the employee was fired for blowing the whistle.

Texas law protects only employees in government jobs.  For employees employed by private enterprises, there is no such protection.  In 1990, the the Texas Supreme Court ruled in Winters v. Houston Chronicle that an employee cannot bring a whistleblower’s claim against a private employer in Texas because no statute permits this type claim. The Supreme Court concluded that the law of employment at will controls.  That case is still good precedent today.

Can You Get Fired for Reporting Fraud?

Texas Law.  The Texas Whistleblower Act, found in Section 554.001 Texas Government Code, protects public employees, such as government employees and teachers, from unjust repercussions for reporting fraud. Specifically, the statute provides that a state or local governmental entity may not suspend or terminate the employment of, or take other adverse personnel action against, a public employee who in good faith reports a violation of law by the employing governmental entity or another public employee to an appropriate law enforcement authority.

This claim is not as easy to pursue as it might appear.  There has been much litigation over the various elements found within the statute that must be satisfied by the plaintiff.  For example, the employee must report the wrongdoing to “an appropriate law enforcement authority.”  That is a legal authority outside the employer’s ranks.  This means reporting to an entity such as the district attorney’s office, someone who can enforce the law against the employer.

As stated above, employees of private employers have no such protection by the State of Texas if the employee reports illegalities at work by the employer.  There is a related line of cases under Sabine Pilots v. Hauck which holds that if an employee refuses to commit a criminal action and the employer fires the employee for refusing to commit the criminal act, the employee has a cause of action for wrongful termination.  This is not a “reporting” incident, but a “refusal” to commit illegality.

Federal Law.  More frequently, employees involved in a whistleblower’s claim must turn to federal law.  Common occurrences include reporting fraud at a nursing home, mental health facility, hospital, or rehabilitation center or reporting the illegal activity of a government employer.  I have seen many of these claims arise in the healthcare setting where an employee observes illegal billing to Medicare.

The Sarbanes-Oxley Act, commonly referred to as “SOX,” is a federal law that requires certain actions of accounting and financial record keeping and reporting for companies and corporations. SOX arose from Sharon Watkins’ reporting of fraud in the Enron scandal.  The statute, which was enacted in 2002, contains eleven sections that place certain requirements on public company board of directors and public accounting firms. Additionally, the Sarbanes-Oxley Act contains numerous provisions that protect whistleblowers from private companies.

Specifically, the Sarbanes Oxley Act, found in 18 U.S.C. §1514A, contains whistleblower protections for private employees reporting fraud. According to the Act, “No company…may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee…because of any lawful act done by the employee.”  The statute enumerates the lawful acts covered:  “provid[ing] information, cause information to be provided, or otherwise assist in an investigation regarding any conduct which the employee reasonably believes constitutes a violation of

  • section 1341,
  • 1343,
  • 1344,
  • 1348,
  • any rule or regulation of the Securities and Exchange Commission, or
  • any provision of Federal law relating to fraud against shareholders, when the information or assistance is provided.”

All of the enumerated statutes cited are types of fraud, e.g., mail fraud, wire fraud, bank fraud, and securities fraud.

Compensation for Termination Because of Reporting Fraud

If someone faces wrongful termination for reporting fraud, that employee may be in line for a hefty compensation package. Federal laws in particular are in place to ensure that whistleblowers feel safe in reporting fraud.  Usually, the employee can make the report anonymously.  The damages awarded will depend on both the strength of the claim and the amount of losses endured by the plaintiff.  Some federal statutes provide a bounty, a percentage of what the government collects after apprehending the wrongdoer and collecting the ill-begotten gains.  A fired employee can be compensated in court for the following:

  1. The False Claims Act requires payment to whistleblowers of between 15 and 30 percent of the government’s monetary sanctions collected if the employee assists with prosecution of fraud in connection with government contracting and other government programs;
  2. The Dodd-Frank Act requires payment to whistleblowers of between 10 percent and 30 percent of monetary sanctions collected if they assist with prosecution of securities and commodities fraud; and
  3. The IRS whistleblower law requires payment to whistleblowers of 15 to 30 percent of monetary sanctions collected if they assist with prosecution of tax fraud.

Employees may be able to recover compensation in the form of reparations:

  • Salary and benefits lost due to unjust termination
  • Salary and benefits that will be lost during the future job search
  • Out-of-pocket expenses endured during the job search
  • Attorneys fees
  • Reparations for emotional and physical harm caused by the termination

Whistleblowers are pivotal in ensuring accountability and transparency, with significant legal frameworks supporting their cause. Whistleblowers must understand that the statutes are complex and each statute contains different language and applies to different fact patterns.  An employee whistleblower needs expert legal assistance to prosecute claims under these statutes.

Consult a Legal Expert

To the untrained eye, whistleblower laws are very complex. At Gardner Employment Law we have years of experience in protecting employees who were unlawfully terminated for reporting fraud. If you need assistance litigating whistleblower laws, we are here to help.

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