New York Appellate Court Rules That Not-for-Profit Corporation Law Creates a Private Right Action Against an Employer for Retaliation for Whistleblowing

On December 9, 2020, the Appellate Division, Second Department, reversing Nassau County Supreme Court, became the first appellate level court in New York to recognize that an employee of a not-for-profit corporation that has 20 or more employees and in the prior fiscal year had annual revenue in excess of $1 million can assert a claim under Not-for-Profit Corporation Law § 715-b that their employment was terminated in retaliation for engaging in whistleblowing activity.

In Ferris v. Lustgarten Foundation, the plaintiff had been employed by the defendant, Lustgarten Foundation, a not-for-profit corporation, for almost 10 years when her employment was terminated in December 2015. She alleged that her employment was terminated in retaliation for reporting two instances of improper fundraising conduct at her not-for-profit employer. She sought damages for, among other things, her employer’s alleged violation of Not-for-Profit Corporation Law § 715-b. The defendant employer moved to dismiss that claim, arguing that Not-for-Profit Corporation Law § 715-b does not afford a private right of action for aggrieved employees. The trial court had dismissed that claim and, on appeal, the Second Department reversed.

Enacted in 2013 and amended in 2016, Not-for-Profit Corporation Law § 715-b requires not-for-profit employers with 20 or more employees and $1 million in revenue in the prior fiscal year to implement a whistleblower policy that protects from retaliation those employees who report suspected improper conduct. It does not expressly provide for a private right of action. The Second Department noted that the plaintiff employee could only recover under the statute if a legislative intent to create such a right of action may “fairly be implied” in the statutory provisions and their legislative history. Under well-established New York law, this inquiry involves three factors: (1) whether the plaintiff is one of the class for whose particular benefit the statute was enacted; (2) whether recognition of a private right of action would promote the legislative purpose; and (3) whether creation of such a right would be consistent with the legislative scheme.

Both the trial and appellate courts agreed that the first two factors were met. However, they disagreed as to whether the third factor, which is often noted to be the “most important” for a court to consider in determining whether to recognize an implied private right of action, was satisfied. The Second Department noted that there is no regulatory agency to enforce compliance with Not-for-Profit Corporation Law § 715-b, and a separate provision (Not-for-Profit Corporation Law § 112[a][7]) provides for the NYS Attorney General Office’s protection of the rights of members, directors, or officers of not-for-profit corporations. The latter does not specifically protect the rights of employees of not-for-profit corporations. Considering the Not-for-Profit Corporation Law’s statutory scheme as a whole, the Second Department held that § 715-b created an implied private right of action for employees who are retaliated against or subject to adverse employment consequences as a result of whistleblowing activities.

Whether the holding in Ferris will result in a significant expansion of the rights of employees of not-for-profit entities in the health care sector presents an interesting question. The reason is that Labor Law § 740, known as the Whistleblower Law, is available to any employee who discloses or threatens to disclose an employer activity or practice that is in violation of a law, rule, or regulation and creates a substantial and specific danger to the public health. And Labor Law § 741, often referred to as the Health Care Whistleblower Law, offers special protections to persons who perform health care services and disclose or threaten to disclose an activity, policy, or practice of the employer that the employee, in good faith, reasonably believes constitutes improper quality of patient care. New York courts have consistently dismissed claims brought under Labor Law § 740 and 741 where the plaintiff’s whistleblowing activity relates to disclosures or threatened disclosures of fraudulent or otherwise improper economic activity. Because the Labor Law contains comprehensive remedies to address retaliation against whistleblowers in the health care industry, it is reasonable to question whether public and private (implied through Not-for-Profit Corporation Law § 715-b) avenues of enforcement would be in harmony and whether a private right of action against not-for-profit employers in the health care industry could be fairly implied.

If you have any questions regarding this legal alert, please contact Brian Culnan or another member of the firm’s Labor and Employment Department.