Christopher Braganza says that welcoming whistleblowers is one of the few ways to ensure the smooth running of a company.

Corporate malpractice is high on the business agenda. Companies are keen to ensure that they do business ethically, that they are seen to do business ethically and that any suspicion of malpractice is rooted out. Following the collapses of Enron and WorldCom, it is clear that failure to have proper procedures in place – and to ensure those procedures are respected – can have catastrophic consequences.

Employees must be able to raise their concerns without fear of reprisal. For international companies, the Sarbanes-Oxley Act, the US legislative response to the Enron scandal, has added more reasons to take whistleblowing seriously. In the UK, aside from the large reputational risks, awards to workers for claims that they have been discriminated against because of blowing the whistle average around £100,000 – nearly twice the maximum award for unfair dismissal. For financial and reputational reasons, employers can no longer afford to ignore whistleblowing.

The UK regime under the Public Interest Disclosure Act 1998

The Public Interest Disclosure Act (PIDA) applies to agency temps, contractors and consultants, as well as employees. There is also no service qualification for claims, making them attractive for dismissed workers with less than the one year's service who want to bring an unfair dismissal claim. The subject matter of the disclosure need not be as dramatic as Enron's accounting fraud – the breach of a worker's contract will suffice. The disclosure need not even be true, provided that the worker reasonably believed it was true and made the disclosure in good faith.

The nightmare for every employer is scandal in the newspapers before it knows of the existence of alleged irregularities. PIDA provides that, generally, disclosure can be made to a person other than an employer only when it is reasonable to do so. Where the employer has a robust whistleblowing procedure and has seriously tried to create a climate where workers can make such disclosures without fear of retribution, it will only be reasonable to make an external disclosure in exceptional cases.

Employers should not shy away from dealing normally with workers who have raised issues, provided they are not victimising workers for raising a concern, and provided the procedure is carefully documented.

The US regime

Sarbanes-Oxley deals with blowing the whistle on financial irregularities and applies to almost all companies listed in the US. Companies must establish anonymous disclosure procedures and the victimisation of whistleblowers is unlawful. The legislation applies to the companies regardless of where the relevant employee works or where the act took place, so in some circumstances both UK and US law will apply.

Conflict between UK and US legislations

The US approach provides for anonymous disclosure, whereas the emphasis in the UK is to protect 'open' whistleblowers from victimisation. It might be argued that the US approach is more realistic. Few of us would raise concerns at work unless we felt that the concerns were serious, but is that a bad thing? Open disclosure may ensure that whistleblowers take their actions sufficiently seriously – the danger is that anonymous disclosure undermines the requirement that disclosures be in good faith.

There are also problems for the anonymous whistleblower where their identity is nevertheless deduced and they are still discriminated against. It will be more difficult for anonymous whistleblowers to establish victimisation, as the discriminator is always going to be able to claim that they had no idea who the whistleblower was.

What do employees need to do?

Having a robust whistleblowing policy in place is good practice, it makes business sense and, for US-listed companies, will be mandatory. But just having a policy is not enough.

Enron had in place one of the US corporate world's most exemplary ethics and whistleblowing policies. Former employee Sherron Watkins is probably the world's most celebrated whistleblower: prior to its collapse, she had drawn her boss's attention to suspicious accounting practices in some of the US firm's partnerships. What Enron lacked was a culture in which employees believed that their concerns would be taken seriously and that the protection the policies and the law afforded them was real.

This culture is not something employers can achieve overnight, but given the financial and reputational risks of ignoring the issue, it is vital that they try.

Christopher Braganza is an employment, pensions and incentives associate at Allen & Overy