Why Companies Self-Sabotage by Punishing Whistleblowers

Posted on February 11, 2021

Critics of financial incentive programs for whistleblowers often paint an unfavorable picture of people who choose to report fraud. From the perspective of these critics, it seems that there are scores of employees eager to witness minor incidents of fraud so that they can get an easy payday and a quick ticket to fame.

When you examine this picture more closely–by looking further into the nature of most qui tam cases or by talking to former whistleblowers–it’s not hard to see that fame and fortune don’t hold up as primary motives.

Even when rewards are offered, most cases brought by whistleblowers take several years to resolve. There is no quick or immediate financial reward, even in the best case scenario.

Furthermore, federal agencies like the Department of Justice (DOJ) are generally disinterested in prosecuting instances of ‘minor’ fraud, or unintentional errors that involve state or federal funding. What they are interested in is identifying deliberate, large-scale fraud schemes and nipping them in the bud.

To do this, they need the help of ordinary citizens willing to speak up for what’s right. In our experience, it takes time and careful consideration before most people decide to report their employers’ fraud to the government.

Employees tend to choose that route when they’ve already tried to address the fraud internally, sometimes repeatedly, and their employers failed to act.

They may also utilize the False Claims Act and similar legislation when their company has created a culture of fear, one in which reporting wrongdoing is highly likely to be met with swift termination.

This, not the promise of money (which is not, in fact, a guarantee), is what prompts employees to research their options and discover that they have a legal right to report fraud.

Why is there a stigma attached to telling the truth?

Fraud reflects poorly on the organization as a whole. This is why whistleblowers should be applauded, not shunned.

There are plenty of psychosocial reasons that whistleblowers may be ostracized by managers and coworkers. A primary factor is that it is generally easier for people to accept that when someone points out flaws in the existing system, it is that person that is wrong, not the system that is wrong.

In a work environment, if the majority of people accept that the system itself is riddled with fraud, they may have to acknowledge their own failure to take action.

It can also be the case that employees are aware of the fraud but do not consider it serious because it isn’t ‘hurting’ anyone.

While there are varying degrees to which fraud can be harmful, it is certainly not innocuous. As it pertains to misconduct involving state or federal funding, a willingness to orchestrate and engage employees in fraudulent schemes demonstrates, at best, a cavalier disregard for the hard-earned money of taxpayers.

At its worst, fraud can lead to the destruction of livelihoods and the deaths of patients. Whether or not it is harmful should not, therefore, be left up to the fraudulent company to decide.

What happens when companies try to silence whistleblowers

Health Net may have deliberately attempted to skirt legislation designed to protect whistleblowers from employer retaliation.

The Securities and Exchange Commission (SEC) is no stranger to the workplace challenges whistleblowers can face, and the agency’s commitment to protecting people who report securities fraud has only increased since the Dodd-Frank Act was passed.

On August 16th, 2016, the SEC announced cease-and-desist proceedings against Health Net, an insurance company whose severance agreements were alleged to have targeted whistleblowers.

Rule 21F-7 of the SEC’s Dodd-Frank Act states:

“No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.”

The agency’s administrative proceedings towards Health Net alleged that within severance agreements, the company suggested any employee that revealed internal information in pursuit of litigation against the company would forfeit severance pay.

Subsequent agreements were allegedly amended to suggest that any former employee who signed a severance agreement would be ineligible to sue the company at all, or to collect whistleblower rewards in such a lawsuit.


Not only would including this type of language in a severance agreement be illegal, but the allegations suggest that Health Net implemented this wording after and in response to the passing of the Dodd-Frank Act’s whistleblower provisions. In other words, Health Net may have deliberately attempted to skirt legislation designed to protect whistleblowers from employer retaliation. They are not the first company to face this type of allegation.

Beyond the illegality of this alleged behavior, it reflects negatively on the company’s integrity. It is understandable for companies to protect trade secrets and other proprietary information as part of severance agreements. Any intentional attempt to block employees from reporting fraud, however, is suspect.

Typically, the existence of whistleblower rights and rewards isn’t a legitimate threat to the finances and reputation of a company unless the company is actually doing something fraudulent. Trying to prevent whistleblowers from benefiting from their rights surreptitiously perpetuates a company culture that rewards secrecy and deception over transparency and truth.

Not only can fines and settlements from the SEC and DOJ cause adverse financial impact to companies; a lack of efficiency in internal reporting systems can be corrosive.

What whistleblowers really want

If companies aren’t actually doing anything wrong, they should not see the existence of whistleblower rights and protections as a threat.

When someone discovers a deliberate fraud scheme at work, their first step is usually to tell their manager, a co-worker, or human resources.

At that point, they are rarely thinking about any reward, nor are they necessarily hoping the company is punished. After all, the company employs the whistleblower, so the best outcome in that early stage is for the company to address the fraud promptly.

Perhaps the whistleblower isn’t ever sure yet if what they’ve witnessed is fraud, but something about it doesn’t seem right.

In many cases, the whistleblower is told that the issue will be handled by the appropriate parties within the company. Sometimes, the whistleblower is told that the fraud is a necessary cost of doing business–and that it’s important for everyone to get on board.

Either way, the whistleblower may try multiple times to resolve the issue internally. When those internal reporting systems fail, and the fraud persists after months or even years, the whistleblower turns to external resources.

They are often unaware of their rights, or that it is possible for them to earn a reward. They just want the fraud to stop, and they feel it is their moral imperative to make sure it does.

If the company were to step in at that initial stage, or even after a second reporting attempt, it would be far easier to correct the issue. If a government investigation did eventually take place, one of the factors considered would be the extent to which the company did or didn’t try to stop the fraud.

It is not enough to tell employees that it’s acceptable to report internal misconduct; companies have to make good on that promise.

How companies can get it right

While it would be ideal for any outright retaliation against whistleblowers to stop, it’s even better for companies to understand the benefits of proactively supporting and rewarding these individuals.

Fraud may yield immediate financial gains for organizations, but it is a foolish long-term strategy. With False Claims Act violations, penalties for each fraudulent claims submission amount to three times the amount of each false claim. Given that reality, demonstrating warmth and gratitude rather than disdain towards internal whistleblowers is appropriate.

It takes a lot of courage for someone to speak out against fraud–whether or not that person feels their job is on the line. By coming to internal reporting managers first, the whistleblower is doing the company a favor.

It is unreasonable, however, to expect anyone to feel comfortable doing so if there is a history of retaliation at the company or a lack of any clear incentive for employees to speak up.

Failing to properly investigate internal reports or efforts to ostracize internal whistleblowers can eventually result in public humiliation and financial repercussions for the organization.

In recent years, a great deal of progress has been made to strengthen legal protections and incentives for whistleblowers. Fraud itself won’t stop, though, until companies understand that standing up for whistleblowers is in their best interest.