Bonus Points: ARB Upholds Whistleblower Order Challenging Bonus Plan

The Department of Labor’s Administrative Review Board (“ARB”) recently upheld an order finding a semiconductor company had constructively discharged a manager who complained the company’s bonus plan violated state wage and hour laws, and in doing so, broadly interpreted the protections offered under the Sarbanes-Oxley Act (“SOX” or “Act”).

In Dietz v. Cypress Semiconductor Corp., the company hired the complainant as a program manager after acquiring his former employer.  Cypress required certain employees to participate in its “Design Bonus Plan,” and although the complainant was never subject to the bonus plan, many of his direct reports were.  Under the bonus plan, Cypress deducted 10% from the participants’ salaries and at the end of each quarter, and it would calculate each employee’s “bonus” based on the employee’s team’s performance.  However, some employees ultimately received less than what they had contributed.  Further, employees who left Cypress before the quarter’s payout forfeited their contributions and bonus.

When the complainant’s direct reports informed him of the compulsory bonus plan, he emailed his supervisor explaining that he believed the program violated both California and Colorado law.  In the email, he explicitly invoked the company’s formal whistleblower policy and cited the state statutes he believed Cypress was violating.   After the complainant sent the email to his supervisor, two of Cypress’s attorneys held a teleconference with him.  In it, they explained they had a legal opinion confirming the legality of the bonus plan.  (In truth, Cypress never produced a written legal opinion, and it was unable to explain before the Administrative Law Judge (“ALJ”) how the plan was legal.)

After the teleconference, the complainant’s managers allegedly began taking resources away from him.  Then, his supervisor sent him a formal disciplinary memo discussing alleged “performance issues.”  The memo subsequently demanded the complainant “confess fault” by writing a response letter outlining his shortcomings.  The memo was to be placed in the complainant’s personnel file, which would have made it “virtually impossible for him to get another job in the industry.”  Notably, the complainant had never had performance issues before, and in fact, he had previously received above averages evaluations for his work.

Instead of confessing fault, though, the complainant wrote a response letter disputing the allegations in his supervisor’s memo and his belief he was being retaliated against for his whistleblower complaint.  He ended his letter by stating he was terminating his employment at Cypress; however, he then immediately circumscribed his resignation by noting he was willing to remain for another month to complete a project he was staffed on unless Cypress chose to terminate his employment sooner.  The next day, the complainant was called into a meeting with his supervisor, an HR representative, and another manager, but no one told him what the meeting was for or set an agenda.  As a result, the complainant feared the meeting could mean only one thing—that he would be fired—so instead of attending the meeting, he resigned effective immediately.

The ALJ determined that the complainant was constructively discharged for reporting what he reasonably believed was fraudulent activity related to the bonus plan.  Although the complainant never specifically mentioned fraud nor any of SOX’s whistleblower provisions in his communications, the ALJ determined he reasonably believed the company was engaging in fraud against its employees.  As for the complainant’s initial mention of resignation in his response letter, the ALJ determined complainant knew Cypress had an aggressive “turnaround policy” where it would attempt to retain employees who expressed an intent to resign; the ALJ determined the complainant anticipated the policy would kick in with his letter so he did not truly intend to resign.

On appeal, Cypress argued that (1) because the alleged violations were of state wage laws, he was not protected by SOX as a whistleblower and (2) the complainant voluntarily resigned so as to defeat his constructive discharge claim.  While the ARB noted several errors in the legal standards the ALJ applied, it concluded overall that substantial evidence supported the ALJ’s finding and affirmed its order.  Specifically, the ARB determined that the complainant reasonably believed that Cypress concealed material facts about the bonus plan, such as requiring compulsory deductions from certain employees.  He presented these beliefs in his initial email to his supervisor and during the teleconference with Cypress’s attorneys.  Given the complainant’s position in the company—as a manager of employees who felt they were being paid less than what they earned—his belief that some fraud had occurred as a result of the concealment of violations of state wage laws was reasonable.

As to the constructive discharge claim, the ARB upheld the ALJ’s finding that a reasonable person in the complainant’s position would have felt that his only option was quitting, albeit with a slight modification to the legal standard the ALJ applied.  The ARB reasoned that the complainant’s response letter to his supervisor’s memo requesting he confess fault was not in fact a resignation but instead an attempt to trigger Cypress’s turnaround policy.  In other words, the complainant’s statements that he was resigning but then offering to stay on temporarily was simply a matter of “hedging his bets.”

Further, the fact that the complainant was called into an agenda-less meeting signaled nothing other than he would be terminated.  Given the three weeks between the complainant’s complaint and his termination, the ARB reasoned that the complainant had sufficiently demonstrated temporal proximity and that his complaint was a contributing factor to his constructive termination.  This was supported, for instance, by the fact that the complainant never had a poor performance review until he complained about the bonus plan but after he complained, Cypress began undermining his ability to perform his job.  Cypress’s culpability was further highlighted, according to the ARB, due to company’s failure to follow its own whistleblower policy in handling complaints.

Ultimately, the Dietz case demonstrates that the current ARB continues to construe SOX very broadly.  Although Dietz’s complaint appeared to be about state law violations, by adding an allegation of concealment, he brought the claim within SOX’s coverage.  In light of this decision, creative plaintiffs’ attorneys may attempt to allege that employee reports of violations not covered by SOX are covered because the employees asserted concealment of the violations.  Moreover, the ARB’s affirmance that Dietz suffered a constructive discharge represents a very broad reading of the term, showing that the ARB continues to be a tough forum for employers under the current administration.