The Critical Importance of Employee Ethics Training
An Overview of Key Laws & the Ethics Impact of a
Recession
April 28,
28 2010
Nick Linn,
Linn Esq.
Esq
•
Shareholder Littler Mendelson
Shareholder,
•
Prior to joining Littler, was VP in charge of
all employment litigation and employmentrelated legal matters for Electronic Data
Systems Corporation in the US and 65+
other countries.
•
Served as counsel to the Audit Committee
of the Board in conjunction with certain
aspects of the Sarbanes-Oxley Act.
•
Represented both private and public sector
employers in a wide variety of employment
litigation and traditional labor matters
throughout the United States.
Reid Bowman, Esq.
•
General Counsel of ELT.
•
Over 25 years of HR and labor
employment law experience, primarily
working with multi-state employers.
•
Designs strategic ethics
ethics, discrimination
prevention, and employment law
compliance programs.
Our Roadmap
•
Ethics Takes Center Stage
•
What is a Code of Conduct?
•
Legal Requirements for Training
•
The Central Role of HR &
Employment Law Issues
•
Training Methodologies
•
Best Practices & Strategies for
Success
Ethics Takes
Center Stage
New Focus in the News
New Tone
Executive Order on
Ethics Commitments:
Requires “every appointee
in every executive agency “ to sign
a detailed
d t il d ethics
thi pledge.
l d
January 20, 2009
New Focus on Enforcement
“It's time for reform -- it's time for
reform that's built on transparency
and accountability
y and mutual
responsibility …
Values fundamental to the new
f
foundation
d ti
we seek
k to
t build
b ild for
f
our economy.”
President Obama
May 14, 2009
New Focus on Enforcement
Latest Federal Budget Ï funding:
•
Fighting racial, ethnic, sexual
preference gender and religious
preference,
discrimination.
•
Enforcing
g regulation
g
of financial
services sector.
•
Enforcing wage & hour and
employee
l
safety
f t laws.
l
•
Enhancing oversight by Office of
Federal Contract Compliance.
Compliance
New Focus on Enforcement
Crackdown on foreign business
bribes:
•
“Foreign Corrupt Practices Act
investigations are one of the FBI’s
FBI s
highest priorities in the criminal
program. Work done in this arena
helps ensure stability in business
dealings internationally, placing all
players on a level playing field.”
Kevin Perkins, FBI assistant director for criminal
investigations, as reported in the Washington Post
February 8, 2010.
A Question for You
My organization has a
published “Code of
Conduct” or “Code of
Ethics.”
• Yes
• No
What is a Code
off Conduct?
C d t?
Defining the Code
Universal set of written standards for governance of
behavior, designed to:
– Deter wrongdoing.
wrongdoing
– Promote honest and ethical conduct, as
well as accountability.
– Promote compliance with applicable
government laws, rules and regulations.
– Promote accurate and timely reporting and
disclosures.
– Promote prompt internal reporting of
violations of the Code and/or the law.
(SEC Definition)
Defining the Code
Critical Issues to Consider:
– The employer-driven
p y
nature of
the Code.
– The Code as a living set of
guidelines and values.
– The growing trend of Code
adoption and education.
What Does the Code Typically
Address?
–
– Antitrust
– Asset Protection
–
– Competing
p
g & Dealing
g
–
Ethically
– Confidentiality
–
– Conflicts of Interest
– Corporate Opportunity
–
– Diversity
–
– Document & Records
–
Protection
– Environmental Standards –
–
Ethical Values,
Culture & Behavior
FCPA
Gift Giving &
Receiving
Harassment &
Discrimination
Insider Trading
Privacy
Reporting
p
g
Safety
Wage and Hour
Legal
Requirements for
Training
The Laws that Mandate Training
•
Code distribution is not enough.
•
Three key drivers for training:
1. The Sarbanes-Oxley Act of 2002
(SOX).
(SOX)
2. The 2004 Federal Sentencing
Guidelines Amendments (FSGs).
3. 2007 & 2008 amendments to the
Federal Acquisition Regulations
(FAR).
Understanding SOX
•
Applies to publicly traded
companies.
•
Outlines requirements for Code
disclosure.
•
Does not actually mandate ethics
and Code of Conduct training.
•
Strongly encourages education
education.
Section 406 of SOX – Code
Requirements
•
Directed the SEC to issue
rules requiring each public
company to disclose
whether or not it has
adopted a Code.
•
If a Code has not been
adopted, a company must
disclose why (law of
shame).
•
Final rules adopted in
January 2003.
NYSE & NASDAQ Governance
Standards
•
Expanding on the SOX section
406 concept, SEC approved new
NYSE and NASDAQ
G
Governance
Standards.
St d d
•
Both exchanges require a Code
covering all employees
employees, officers
and directors.
•
The Code must be available to
the public.
Section 301 of SOX – Reporting
Requirements
•
Each
E
hA
Audit
dit C
Committee
itt mustt
establish a procedure for the
confidential, anonymous
reporting of complaints about
audit and financial matters.
•
Effective procedures include
training & education.
Anti-Retaliation Protections:
Article 8 of SOX:
•
Protects the employee who provides
information about acts he/she
reasonably
bl b
believes
li
tto b
be a violation
i l ti off
securities laws, rules of the SEC, or
laws relating to fraud against
shareholders.
•
Protected employees cannot be
discharged, demoted, suspended,
harassed,, or otherwise discriminated
against.
The Trend in Retaliation Claims
$270,000
$250,00
Average Recovery
in Whistleblower
Discrimination
sc
a o
Lawsuit
Median Jury
Award in Title VII
Discrimination
Lawsuit
Source: Employment Practice
Liability:
Jury Awards Trends & Statistics,
2005, Jury Verdict Research,
Horsham, PA.
Source:: Employment Practice
Liability: Jury Award Trends &
Statistics (2008 Ed.)
SOX & Private Employers?
•
SOX standards are being
widely embraced by privately
held companies:
– Good business practice to
mitigate risk & liability.
– Similar legislation
g
expected
p
for private companies.
– Many privately held
companies become public.
The Federal Sentencing Guidelines
•
Rules
R
les that set o
outt a uniform
niform sentencing
policy for convicted defendants. Judges
use these guidelines to determine
p
punishment.
•
Employers can be liable for employees’
illegal conduct.
•
Average used to be:
– $1.9M (shortly after FSGs).
•
Now average total sanctions is $49M.
Civil Application?
• A long and extensive
history of courts and
regulatory agencies using
the FSGs to establish
expected standards of
conduct for employers,
and to determine
associated fines and
penalties for not meeting
those standards.
The Federal Sentencing Guidelines
Updated
•
Amended in November 2004 to include
critical training requirements.
•
Require all employers to:
(1) Adopt comprehensive ethics and
compliance programs, and
(2) Train on the fundamentals of those
programs.
•
Bottom line = Code + mandatory training.
•
No specific deadline – but impact was
immediate.
Distributing the Code is NOT
Enough
•
FSGs require employers to “conduct
effective training programs” –
formally planned and implemented.
•
Parallel to federal harassment and
discrimination training requirements –
a policy is not enough.
enough (Similar to
US Supreme Court and EEOC
Guidelines.)
•
Employers with <200 employees may
use more informal methods.
The Broad Scope of the FSGs
•
The employers impacted? Everyone.
– Apply to “all organizations, whether publicly
or privately held, and of whatever nature,
such as corporations, partnerships, labor
unions,
i
pension
i ffunds,
d trusts, nonprofit
fi
entities and government units.”
•
The training audience? Everyone.
– “[M]embers of the governing authority,
high-level personnel, substantial authority
personnel, the organization’s employees,
and, as appropriate, the organization’s
agents.”
How Often Must Training Occur?
•
•
•
•
“Periodically
Periodically.”
Same term used by US Supreme
Court for harassment /
discrimination prevention
training.
Same term used and defined by
CA’s
CA
s AB 1825 (mandatory
harassment training) – every 2
years.
The ethics and compliance
program is not a one time
event.
The FSG Pay Off
•
Potential fines and punishment
p
can be substantially mitigated if
employers can demonstrate
proactive steps to prevent unethical
g conduct.
and illegal
– “The potential fine range for a
criminal conviction can be
significantly reduced – in some
cases up to 95 percent – if an
organization can demonstrate that
it had put in place an effective
compliance and ethics program
and that the criminal violation
represented an aberration within
an otherwise law-abiding
community ”
community.
And One More for Government
Contractors
2007 and 2008
Amendments to FAR
•
Apply to contracts worth $5 million or more and which require at
least 120 days to perform
perform.
•
Must develop a written Code of Ethics and Business Conduct within
30 days of the contract award; and
•
Must promote compliance within 90 days after the award by
establishing an employee ethics and compliance training
program.
And One More for Government
Contractors
2007 and 2008
Amendments to FAR
•
Effective December 24, 2007, clarified December 12, 2008.
•
Applies to all new contracts, but does not apply retroactively to
existing contracts.
•
Contractors that fail to comply with the new requirements could face
withheld payments, loss of fee award, or even debarment,
suspension or other disciplinary action.
And One More for Government
Contractors
2007 and 2008
Amendments to the FAR
•
You must train everyone in the organization – not just the people
actually involved in executing the government contract
contract.
•
Requirement flows through to subcontractors.
•
Requires broad-based Code training – not just on the regulations
or how to do business with the government.
•
Training must be “ongoing.”
“ongoing ”
So What is “Mandatory”
Mandatory Training?
•
It is not illegal to fail to train
train. (Type of
training law where it is illegal? CA’s AB
1825 - mandatory harassment training.)
•
FSGs: If found liable for misconduct or
convicted of a crime, however, failing
to train will without a doubt result in
increased fines and damages
damages. The
directive in the Guidelines is clear.
•
FAR Amendments: Direct hit to
revenue.
So What is “Mandatory”
Mandatory Training?
•
Is there really a practical difference
between a mandatory training
guideline, and a law that states failing
to train is illegal?
– NO.
•
CA’s AB 1825 carries no penalties! Like
the FSGs,
FSGs the real risks are:
– Being targeted by plaintiffs / the
plaintiff’s bar.
– The impact on damages if
misconduct does occur.
Big Picture
Regardless of how you define “mandatory”…
the trend is clear:
Code of Conduct training is here to stay…
And it’s going to remain a critical
way to manage legal risks.
SOX
FSG’s
FAR
A Question for You
On average, what
percentage of ethics hotline
complaints are related to HR
/ employment law issues?
•
•
•
25%
45%
65%
The Central Role of
HR and Employment
p y
Law Issues
The Central Role of HR /
Employment Issues
•
•
Largest impact on the largest number
of employees.
Hotline statistics are telling:
– 61% of initial allegation reports were HR
related. (Global Compliance Services)
– 62% of complaints were comprised of:
harassment / discrimination, wage and
hour, workplace violence, workplace
policy violation and workplace safety.
(EthicsPoint)
– 70% of hotline reports measured over a
one year period were employment law
related. (The Network)
(Open Compliance & Ethics Group – 2004)
Misconduct Most Commonly
Observed by Employees
Ethics Resource Center 2009 Survey
y
– 22% - Abusive or intimidating behavior
toward employees.
– 19% - Lying to employees, customers,
vendors
d
or th
the public.
bli
– 18% - A situation that placed employee
interests over organizational interests.
– 11% - Health or Safety regulation
violations.
violations
– 14% - Discrimination on the basis of
race, color, gender, age or other
categories.
– 11% - Employee benefits violations
violations.
¾ Majority are “classic”
p y
law issues!
employment
A Case Study: Boeing
•
Harry Stonecipher (CEO) resigns over a
consensual sexual relationship with a
female subordinate. (2005)
•
Board
B
d requests
t hi
his resignation
i
ti because
b
of the violation of the Code.
•
Stonecipher initiated the Code’s
Code s creation
creation,
which bore his signature.
•
Ethics and Code of Conduct training
should
h ld iinclude
l d a healthy
h lth dose
d
off HR /
employment issues.
Fast Forward: Paul Wolfowitz
•
World Bank President Paul Wolfowitz is
accused of securing a raise and transfer
for his “long time companion.”
•
Wolfowitz resigns in May 2007.
•
Clearly a consensual relationship. The
i
issue
arose b
because W
Wolfowitz
lf it was a
direct supervisor.
•
Not just about “sex
sex in the workplace
workplace.”
•
About ethics, appearance and the
Code.
Code
Fast Forward ‘09:
09: More Sex Scandals
• June 2009 – Sanford
Sanford’s
s whereabouts are
“unknown” and his staff cannot reach him.
Claims to be hiking the Appalachian Trail,
but is actually in South America.
• Having an affair with an Argentine woman
he describes as his “soul mate.”
g
• Sanford,, married with four children,, resigns
as Chairman of the Republican Governor’s
Association.
• Claims no public funds were used to
supportt the
th affair,
ff i but
b t a reporter
t discovers
di
otherwise using the Freedom of Information
Act.
• And consider the workplace impact
impact.
What Does Code of Conduct
Training Typically Address?
–
– Antitrust
– Asset Protection
–
– Competing & Dealing
–
Ethically
t ca y
– Confidentiality
–
– Conflicts of Interest
– Corporate Opportunity
–
– Diversity
–
– Document & Records
–
Protection
– Environmental Standards –
–
Ethical Values
Values,
Culture & Behavior
FCPA
Gift Giving
g&
Receiving
Harassment &
Discrimination
I id T
Insider
Trading
di
Privacy
Reporting
Safety
Wage and Hour
What Does Code of Conduct
Training Typically Address?
– Training cannot cover every aspect of
the Code.
– Training
T i i should
h ld map tto th
the mostt
important components of the Code for
your organization, and for your
industry.
industry
– Training should highlight reporting
channels.
– Training
T i i should
h ld sett a ttone.
A Question for You
My organization trains on
ethics and the Code of
Conduct.
• Yes
• No
A Question for You
How is training
conducted?
•
•
•
Classroom sessions
Online
Informally
f
(i.e.
(
during
staff meetings)
Training Methodologies
– In the classroom.
– Online, self-paced.
– Webinar.
– “Informal means” – Under the
FSGs, only for employers with
<200 employees (i.e. staff
meetings).
Understanding the Online Option
– Available 24/7 from the desktop
desktop.
– Fully automated tracking and
reporting capabilities.
– Scrutinize the quality –
engaging, contextual and
interactive.
– Customize to your Code.
ELT’s Ethics & Code of Conduct Course
•
Meets SOX, FSG, and FAR mandates.
•
Choose from 30+ modular topics.
•
Fully customizable to reflect your Code,
policies,
li i
and
d reporting
ti procedures.
d
•
Distributes and tracks your Code.
•
Choose different topics for different
audiences.
•
Change ethics training content over
titime.
•
Developed by
•
Endorsed b
by
A Question for You
How has your organization’s
organization s
budget for ethics and
compliance training been
impacted by the current
economy?
• The budget has increased.
increased
• The budget has stayed the
same.
• The budget has decreased.
decreased
• I am not sure/don’t know.
Best Practices &
Strategies
g for Success
New Paradigm: Return on Ethics
What is your
organization’s
reputation worth?
New Paradigm: Return on Ethics
•
The financial benefit of an ethical
workplace. (Forbes.com article by
Deloitte Chair of the Board, Sharon
All
Allen,
JJuly
l ’09
’09.))
•
Ethics now more important now than
ever:
•
97% of MBA grads say they would give
up $15,000 to work for ethical
companies.
companies
New Paradigm: Return on Ethics
•
Companies lose 7% of revenues to
fraud in 2008 – more than 1 trillion
dollars.
•
100 Most ethical companies’
companies stock
increases at twice the rate of the S&P
500.
•
Employees in organizations with a
strong ethical culture are more likely to
p misconduct ((79%)) than those with
report
a weak ethical culture (48%).
(Ethics Resource Center, 2005)
A Question for You
Do you believe the current
tough economy has created a
greater incentive or temptation
for employees at your
organization to behave
unethically?
• Yes
• No
Strategies for Success
– Secure high level sponsorship: HR,
Legal, Employee Relations, Risk
M
Management,
t IT.
IT
– Carefully manage the “buy in”
process; designate a clear project
owner.
– Mandate the training with a top down
directive.
St t i for
Strategies
f S
Success
– Carefully manage the customization
process – balancing the “wish list” against
time, expense and viability.
– Establish clear goals and metrics for:
– Completion rates.
– Employee feedback.
– Reduced claims & liability.
– Behavior change.
– Implement Effective Training: Invest in a
focused set of quality courses you can
really use.
Questions? Resources?
Interested in our solutions?
[email protected]
Additional substantive questions?
nlinn@littler com
[email protected]
[email protected]
www.elt-inc.com
877 358 4621
877.358.4621