Businesses that enter into contracts with state or local government entities in Pennsylvania need to be aware of a new liability threat – lawsuits from employees alleging waste or wrongdoing in connection with the award of public funds.  It is critical for businesses to understand these recent changes and the expansion of Pennsylvania’s Whistleblower Law. Businesses that depend upon the award of public contracts should prepare now, to preclude an award of civil damages to former or current employees later.

What Is The Whistleblower Law?     

Under Pennsylvania’s Whistleblower Law, a “whistleblower” is a person “who witnesses or has evidence of wrongdoing or waste while employed and who makes a good faith report of the wrongdoing or waste, verbally or in writing, to one of the person’s superiors, to an agent of the employer or to an appropriate authority.”  The law provides that no employer may “discharge, threaten or otherwise discriminate or retaliate against an employee  .  .  .  because the employee or the person acting on behalf of the employee makes a good faith report or is about to report, verbally or in writing, to the employer or appropriate authority an instance of wrongdoing or waste by a public body or an instance of waste by any other employer as defined by this act.”  The law also prohibits retaliation against the employee for the employee’s cooperation in any investigation, hearing or inquiry into the report. 

The terms “waste” and “wrongdoing” have rather expansive meanings under the Whistleblower Law. “Waste” is defined as “an employer's conduct or omissions which result in substantial abuse, misuse, destruction or loss of funds or resources belonging to or derived from Commonwealth or political subdivision sources.” “Wrongdoing” is defined as “a violation which is not of a merely technical or minimal nature of a Federal or State statute or regulation, of a political subdivision ordinance or regulation or of a code of conduct or ethics designed to protect the interest of the public or the employer.”  The case law interpreting these terms does little to clarify their precise meaning.

Since the passage of the Whistleblower Law in 1986, there have been conflicting court opinions about the extent to which the protections of the Pennsylvania Whistleblower Law apply to employees of  businesses that receive state or local funds.  For example, in Denton v. Silver Stream Nursing and Rehabilitation Center, the Pennsylvania Superior Court held that an employee of a private nursing home was covered by the law simply because the nursing home received Medicaid funding – thus qualifying it as a “public body” under the law.  The federal courts, in an effort to predict how the Pennsylvania Supreme Court would rule on the issue, came to the opposite conclusion in Cohen v. Salik Health Care, ruling that Salik did not qualify as a “public body” because the funding it received was not specifically appropriated to it by the legislature.  The Pennsylvania Supreme Court has yet to rule on the issue.

The debate about the reach of the Whistleblower Law to businesses that receive state or local funds, once the subject of disagreement in the courts, was rendered largely moot by Acts 87 and 88 of 2014.  This is because those acts expanded the reach of the law to “employers”, which was defined to include “any of the following which receives money from a public body to perform work or provide services relative to the performance of work for or the provision of services to a public body: (a) An individual; (2) A partnership; (3) An association; (4) a corporation for profit; and (5) a corporation not for profit.”  Under this definition, businesses in receipt of state or local funds are now clearly subject to the Whistleblower Law, regardless of whether the business meets the legal definition of a “public body."

What Are The Consequences Of Violating The Whistleblower Law?

As a result of these legislative changes, it is important for businesses that receive state or local funds to be mindful of the Whistleblower Law and the penalties that can result from noncompliance.  An employee who alleges a violation of the law may bring a civil action against the employer within 180 days of the alleged violation.  In order to maintain this civil action, the employee must show that “prior to the alleged reprisal [by the employer], the employee or a person acting on behalf of the employee had reported or was about to report in good faith, verbally or in writing, an instance of wrongdoing or waste to the employer or an appropriate authority.”  An employer may defend against this action if the employer proves that “the action by the employer occurred for separate and legitimate reasons, which are not merely pretextual.”  The remedies for a violation of the law include: (1) reinstatement with full fringe benefits and seniority rights; (2) back pay; (3) reimbursement of the employee’s reasonable attorney and witness fees; (4) a fine of up to $10,000; and (5) other damages as appropriate.

How Can Businesses Avoid Liability Under The Whistleblower Law?

Businesses can protect themselves from liability under the Pennsylvania Whistleblower Law by ensuring that they have implemented policies and procedures to prevent waste and wrongdoing in connection with the receipt of state or local funds.  It is also important that businesses post notices and use other means to notify employees and keep them informed of the protections and obligations under the law.  Aside from these common sense measures, it is crucial that employers contemporaneously document any employee performance deficiencies or misconduct and take timely steps to correct the behavior.  Waiting until after an employee has made a report of waste and/or wrongdoing to document prior employee performance deficiencies or misconduct makes it more difficult for an employer to argue that a personnel action is not related to the whistleblower complaint.  Finally, employers should have procedures in place for a neutral investigation of whistleblower complaints by outside counsel or a designated official of the company to avoid the perception of bias in favor of the employer.