Severance, Confidentiality Agreements Must Not Limit Whistleblower Awards, SEC Orders
Author: Marta Moakley, XpertHR Legal Editor
August 17, 2016
The Securities and Exchange Commission (SEC) has issued a cease and desist order targeting provisions in severance agreements that limit an employee's ability to cash in on a whistleblower award.
As a result, employers subject to SEC regulations should review existing confidentiality and/or severance agreements for any provisions that could limit whistleblower bounties or awards.
As the SEC began awarding whistleblower bounties through its Whistleblower Protection Program in an effort to encourage individuals to come forward with information regarding compliance violations, many employers instituted various methods to encourage internal whistleblowing.
However, the SEC has been forceful in enforcing compliance with Rule 21F-17, which provides:
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.
Atlanta-based employer BlueLinx included a provision in its severance agreement that required departing employees to notify the company's legal department prior to disclosing any financial or business information to any third parties - without expressly exempting the SEC from the scope of this restriction. Another provision stated:
Employee further acknowledges and agrees that nothing in this Agreement prevents Employee from filing a charge with...the Equal Employment Opportunity Commission, the National Labor Relations Board, the Occupational Safety and Health Administration, the Securities and Exchange Commission or any other administrative agency if applicable law requires that Employee be permitted to do so; however, Employee understands and agrees that Employee is waiving the right to any monetary recovery in connection with any such complaint or charge that Employee may file with an administrative agency.
The employer added the monetary recovery prohibition to all of its severance agreements in mid-2013, nearly two years after the SEC's adoption of Rule 21F-17 that prohibits any action to impede someone from communicating with the SEC about possible securities law violations. Approximately 160 employees signed an agreement containing this provision.
"Companies simply cannot undercut a key tenet of our whistleblower program by requiring employees to forego potential whistleblower awards in order to receive their severance payments," stated Jane Norberg, Acting Chief of the SEC's Office of the Whistleblower.
The employer agreed to the following to address the SEC's concerns:
- Pay a $265,000 penalty to settle the claim;
- Amend its severance agreements to make clear that employees may report possible securities law violations to the SEC and other federal agencies without the employer's prior approval and without having to forfeit any resulting whistleblower award; and
- Make reasonable efforts to contact former employees who had executed severance agreements after Aug. 12, 2011, to notify them that the employer does not prohibit former employees from providing information to the SEC staff or from accepting SEC whistleblower awards.
Specifically, the employer agreed to include the following provision in any agreement that includes prohibitions on the use or disclosure of confidential business information:
Protected Rights. Employee understands that nothing contained in this Agreement limits Employee's ability to file a charge or complaint with the Equal Employment Opportunity Commission, the National Labor Relations Board, the Occupational Safety and Health Administration, the Securities and Exchange Commission or any other federal, state or local governmental agency or commission ("Government Agencies"). Employee further understands that this Agreement does not limit Employee's ability to communicate with any Government Agencies or otherwise participate in any investigation or proceeding that may be conducted by any Government Agency, including providing documents or other information, without notice to the Company. This Agreement does not limit Employee's right to receive an award for information provided to any Government Agencies.
Employers may wish to amend provisions in their existing severance agreements to include this language.