In August, the Securities and Exchange Commission issued a
Cease and Desist Order that
employers cannot require an employee in a severance agreement to waive their
right to collect a financial award from a government agency because such a
provision removes the financial incentive for the employee to report illegal
conduct by the employer. Such provisions
are common in severance agreements because the employer is paying an employee money
to which the employee is not otherwise entitled in order to buy future peace and
does not wish to have to pay the employee twice if the employee later pursues a
claim with a government agency. While
the SEC decision and position are based on an unusual SEC regulation that only
applies to publicly traded companies, employers should remain alert to other government
agencies attempting to adopt a similar position.
Following the Great
Recession, Congress enacted stronger SEC whistleblower laws in the Dodd-Frank
Wall Street Reform and Consumer Protection Act, including provisions providing
for financial bounties to be paid to individuals who report corporate
wrongdoing to the SEC. The SEC then
enacted regulations, including the following provision at 17 C.F.R. §
240.21F-17:
Staff communications
with individuals reporting possible securities law violations.
(a) 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 (other than agreements dealing with information
covered by § 240.21F-4(b)(4)(i) and § 240.21F-4(b)(4)(ii) of this chapter
related to the legal representation of a client) with respect to such
communications.
In 2015, the SEC announced that it violated this regulation
to require employees to first report to the Company any disclosure of
confidential information before exercising their right to engage in
whistleblowing to the SEC. In August, it
found that an Atlanta employer had a similar confidentiality provision in its
severance agreements which stated, in part,
Employee has not and in the future will not use or disclose
to any third party Confidential Information, unless compelled by law and after
notice to BlueLinx. * * * If the Employee has any question regarding what data
or information would be considered by BlueLinx to be information subject to
this provision, the Employee agrees to contact BlueLinx’s Legal Department in
writing for written clarification.
and/or
[The Employee shall not] disclose to any person or entity not
expressly authorized by the Company any Confidential Information or Trade
Secrets….Anything herein to the contrary notwithstanding, you shall not be
restricted from disclosing or using Confidential Information or Trade Secrets
that are required to be disclosed by law, court or other legal process;
provided, however, that in the event disclosure is required by law, you shall
provide the Company’s Legal Department with prompt written notice of such
requirement in time to permit the Company to seek an appropriate protective
order or other similar protection prior to any such disclosure by you.
. . . .
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. (Emphasis
added.)
The SEC determined that:
by requiring its departing employees to forgo any monetary
recovery in connection with providing information to the Commission, BlueLinx
removed the critically important financial incentives that are intended to
encourage persons to communicate directly with the Commission staff about
possible securities law violations.
Restrictions on the ability of employees to share
confidential corporate information regarding possible securities law violations
with the Commission and to accept financial awards for providing information to
the Commission, such as those contained in the Severance Agreements, undermine
the purpose of Section 21F, which is to “encourage individuals to report to the
Commission,” and violate Rule 21F-17(a) by impeding individuals from
communicating directly with the Commission staff about possible securities law
violations.
The employer resolved the dispute with the EEOC, paid a
$265,000 penalty to the SEC and agreed to replace the offending paragraph with
the following, which permitted departed employees to not only collect financial
bounties awarded by the SEC, but to also accept financial compensation from the
EEOC, NLRB, and OSHA:
“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.”
One could argue that the SEC position only applies to
waivers of bounties paid by the SEC,
as opposed waivers of any right to receive any future or additional monies from
the employer.
NOTICE: This summary is designed merely to inform and
alert you of recent legal developments. It does not constitute legal advice and
does not apply to any particular situation because different facts could lead
to different results. Information here can be changed or amended without
notice. Readers should not act upon this information without legal advice. If
you have any questions about anything you have read, you should consult with or
retain an employment attorney.
