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EU Whistleblower Directive: An Impetus For A Strong Corporate Ethics Culture

The European Parliament voted on April 16th, 2019 to approve groundbreaking legislation that will harmonize and strengthen whistleblower protections across the European Union (EU)’s member states.

The implications of this new law are significant, as whistleblowers will enjoy a wide range of legal protections that should make it dramatically easier for employees to speak up when they see misconduct inside an organization. Moreover, all employers with at least 50 employees will be required to run internal reporting channels of a high standard. The adoption of the directive comes after other instruments such as mandatory arbitration clauses and non-disclosure agreements (NDAs) have come under fire for stifling whistleblowers and enabling continued misconduct in organizations.

In light of this development, businesses are well-advised to consider the strong benefits of thinking about how they can ensure their corporate culture is firmly centered around strong morals and ethical practices. Indeed, if companies fail to drive the message of ethics to the core of their organization, they can no longer expect employees to keep quiet in the face of harsh consequences, as is commonly the case now.

The whistleblower directive is a seachange moment for businesses in the EU and an unmissable opportunity to ramp up the focus on ethics in your organization as the best defense against misconduct and its many consequences.

What Does the Directive Mean for Businesses?

In practical terms, all employers in the public and private sectors with at least 50 employees, will be required to set up internal reporting channels. As the whistleblower directive will be implemented on the member state level, there will likely be some differences in the exact requirements imposed by national authorities. Today, only 10 out of 27 member states in the EU have comprehensive whistleblower legislation in place. Even for the member states that have comprehensive legislation in place, there may be significant differences between the current legislation and the new directive.

However, at a minimum the directive requires that internal reporting channels contain the following elements:

  1. Internal channels and procedures for reporting which:
    • Are secure and guarantee confidentiality of the reporting party and any other mentioned third party
    • Allow for acknowledgment of receipt within 7 days
    • Have clear and easily accessible information on reporting to external authorities
    • Allow for reporting in writing and/or orally through telephone lines or other voice messaging services
  2. The ability to receive reports both from the organization’s employees and other persons in contact with the entity in a work-related context. Such persons could be third parties, suppliers, partners etc.
    • Companies with a headcount between 50 and 249 employees may share resources for the receipt and possibly the investigation of reports
  3. Recordkeeping in line with confidentiality requirements for an appropriate timeframe, either as a stored audio recording or in the form of detailed minutes signed by the reporting person

Ensuring your organization complies with the requirements spelled out above will require an assessment of your current procedures to make sure your organization is compliant at the time the directive is transposed into national law.

However, the impact of the directive on businesses is likely to be significantly more far-reaching. An analysis by the Government Accountability Project shows that the directive gives whistleblowers rights that surpass U.S. laws. For instance, the new directive includes a presumption of retaliation if the employee is harmed following a protected whistleblower action. Moreover, the directive requires member states to provide legal aid as well as financial and psychological counseling. Employers and others will also be banned from filing retaliatory lawsuits; such suits include seeking damages for violating gag orders, breach of contract, and similar claims.

In short, employers will have to exercise extreme caution dealing with whistleblowers going forward. As the old proverb goes: “prevention is better than cure”. The introduction of the directive is a major opportunity for companies to push for a strong ethical culture that will prevent misconduct, but also encourages employees to use internal channels in order to build trust.

Whistleblowers May Now Bypass Internal Reporting Channels Completely

The question of whether or not whistleblowers first have to use internal reporting channels before alerting public authorities of their complaint proved to be a major sticking point in the final negotiations. In the final few days of the negotiations, a number of governments, reportedly led by Germany and France, kept insisting that whistleblowers would have to use internal reporting channels before alerting regulators. Ultimately, it was agreed that whistleblowers are free to elect to bypass internal reporting channels.

What does this mean for businesses? Crucially, whistleblowers will now feel emboldened to bypass internal reporting channels if they do not feel confident that their notifications will be taken seriously, handled confidentially, or that they will face retaliation of any sort as a result of their decision to raise their concerns internally.

Questionable Practices On Their Way Out: Mandatory Arbitration and NDAs Stifling Whistleblowers

The introduction of legal protection for whistleblowers bypassing internal reporting channels is clearly a strong argument for a focus on developing your internal ethics culture. However, this development does not stand alone; other questionable practices that stifle reporting of misconduct have come under fire recently.

Consider mandatory arbitration clauses: a widely used means of alternative dispute resolution. It is common in the corporate world to include mandatory arbitration clauses in employment contracts. This means the employee’s claims regarding harassment, discrimination, and other related topics may not be fought in court but have to be settled in private arbitration.

The practice has come under fire in recent years for the perceived imbalance of power in such proceedings as there is typically no option to appeal, the amount and type of evidence that may be supplied are severely limited, and there is no (sympathetic) jury to hear the claims. Moreover, the proceedings stay private, meaning that allegations of serious misconduct, including by senior leadership, stay hidden from the public. As a result, employees are far less likely to win cases in private arbitration and when they do, the awards tend to be far lower than in employment-based litigation.

A number of major companies have recently ditched mandatory arbitration clauses under pressure from their workers. Google dropped the practice in February 2019 after sustained protests from its workforce including a 20,000 people walk-out. Moreover, legislative efforts to ban the practice are gaining steam. The FAIR Act, a bill severely restricting forced arbitration is currently being considered in U.S. Congress.

Another practice that is subject to heavy criticism at the moment is the use of non-disclosure agreements (NDAs) struck between employers and whistleblowers that attempt to raise concerns internally. A lot of criticism has been directed at the treatment of Howard Wilkinson, the former head of Danske Bank’s Baltics trading unit, who blew the whistle on what is suspected money-laundering said amount to over EUR 200 billion.

Wilkinson tried to alert his superiors of the dirty money flowing through the bank four times, but was rebuffed each time. When he informed his superiors that he was going to inform the Estonian authorities of his findings, the bank hastily drew up a highly restrictive NDA Wilkinson was forced to sign in order to prevent him from losing his severance pay and other benefits. As a result, Wilkinson is only able to divulge information to authorities now to the extent that Danske Bank grants waivers for specific pieces of information to share with authorities. Danske Bank faced extensive critical questioning from lawmakers in Denmark and the European Parliament over the NDA.

NDAs prohibiting the disclosure of information about illegal activities have long been banned by the Securities and Exchange Commission (SEC) in the United States. The EU whistleblower directive contains a provision requiring states to ensure that the rights and remedies provided for in the directive may not be waived or limited by any type of agreement, including a pre-dispute arbitration agreement. This provision should in effect, depending on implementation, ensure that NDAs such as the one Wilkinson had to sign will no longer be upheld in court.

The point is this: practices that businesses have relied on to handle employment disputes and allegations of misconduct internally are either being outlawed directly or face criticism for being perceived as unethical or unfair. Rather than continuing to rely on questionable practices as long as possible, companies should take this moment as an opportunity to focus on strengthening their ethics and compliance culture. Indeed, having an ethical corporate culture in place may help prevent misconduct in the first place.

The Bottom Line

Following the adoption of the whistleblower directive on April 16th, 2019, member states will now have two years until the directive will enter into force, provided EU ministers sign off on the directive. Organizations with more than 50 but less than 250 employees will have an additional two years to make sure they are compliant.

The whistleblower directive is a groundbreaking piece of legislation. Whistleblowers throughout the European Union are set to enjoy wide-ranging protections from retaliation when they report their concerns, regardless of whether the concerns were raised internally or not. In practice this means that whistleblowers can no longer be stifled using non-disclosure agreements, forced arbitration, or other questionable practices that have long been commonplace in the corporate world.

The only answer to this development is to double down on your efforts to implement a strong ethics and compliance culture. Indeed, your best defense against misconduct is to ensure that employees feel supported to voice their concerns internally without fear of retaliation. If you fail to ensure employees feel confident their concerns will be handled carefully and diligently, they may just elect to approach the authorities directly, which means you miss out on a chance to handle the concerns internally, as much as possible.

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