Take a look at the most recent severance agreement your company used. Strict confidentiality clause with requirement to notify the company of any third-party request for confidential information? Check. Waiver of right to monetary recovery in an agency investigation? Check. It would be no surprise to see a severance agreement with such provisions as they have been standard for years. However, following August 2016 cease-and-desist orders entered by the U.S. Securities and Exchange Commission (SEC), such provisions are now unlawful. Specifically, the SEC has sanctioned companies with severance agreements that contain a waiver or release by the former employee of any right to monetary recovery arising from a governmental investigation (such as an SEC whistleblower action) and that require former employees to notify the company if they were required by law to disclose confidential information.
In the same month as these orders, the U.S. Department of Labor (DOL) issued an internal memo to its regional administrators that foreshadows DOL attacks on severance agreements. The SEC’s and DOL’s scrutiny of severance agreements follow earlier scrutiny by the Equal Employment Opportunity Commission (EEOC) and other government agencies. These developments provide an urgency for company counsel to bring their employment agreements and policies into compliance.
Section 21F of the Securities Exchange Act
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted, which amended the Securities Exchange Act (the Act) by, among other things, adding Section 21F, “Whistleblower Incentives and Protection.” Section 21F requires the SEC to pay awards to whistleblowers who provide the SEC with original information about violations of the federal securities law.To enforce Section 21F, the SEC adopted a set of rules that includes Rule 21F-17, which became effective in August 2011 and provides in relevant part:
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 SEC’s August 2016 cease-and-desist orders in BlueLinx Holdings Inc. and Health Net, Inc. involve language in severance agreements the SEC found to violate Rule 21F-17.
BlueLinx Holdings Inc.
On Aug. 10, 2016, the SEC issued a cease-and-desist order in BlueLinx Holdings Inc. regarding language used by BlueLinx in severance agreements with former employees that the SEC found to violate Rule 21F-17. See http://bit.ly/2eRG8ME. Specifically, the severance agreements used by BlueLinx had a confidentiality clause that stated:
[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.
The SEC held that by requiring departing employees to notify the company’s Legal Department prior to disclosures of information to third parties without exempting the SEC from the scope of this restriction, BlueLinx “forced those employees to choose between identifying themselves to the company as whistleblowers or potentially losing their severance pay and benefits.” The SEC also held that BlueLinx had another clause in its severance agreements that violated Rule 21F-17. This clause 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. (emphasis added).
The SEC held that by requiring employees to forgo any monetary recovery arising out of an administrative agency investigation, 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.”
For these violations, the SEC fined BlueLinx $265,000 and ordered the company to make reasonable efforts to contact former employees who signed any of its severance agreements in the preceding five years, and provide those former employees with the SEC’s order. Additionally, the SEC required BlueLinx prospectively to modify its severance agreements and any other agreements with employees or former employees to ensure any prohibitions on the disclosure of confidential information would not limit or restrict the individual’s right to communicate with or provide information to government agencies (including participating in agency investigations) without notice to the company, and, furthermore, such agreements would not waive an individual’s right to receive a monetary reward for information provided to a government agency.
Health Net, Inc.
On Aug. 16, 2016, the SEC issued a cease-and-desist order in Health Net, Inc. regarding language used by Health Net in severance agreements with former employees that the SEC found to violate Rule 21F-17. See http://bit.ly/2dIBHXi. In August 2011, Health Net amended its severance agreement to specify that, while not prohibited from participating in a governmental investigation, the former employee was prohibited from filing an application for, or accepting, a whistleblower award from the SEC. In June 2013, Health Net removed this language from its severance agreement, but retained a restriction stating the employee “waives any right to any individual monetary recovery … in any proceeding based on any communication by Employee to any federal, state or local government agency or department.”
The SEC acknowledged that it was unaware of any instance in which a former Health Net employee who executed a severance agreement refrained from communicating directly with the SEC about potential securities violations or any instance in which Health Net took action to enforce the provisions at-issue. Nonetheless, the SEC found these provisions “directly targeted the SEC’s whistleblower program by removing the critically important financial incentives that are intended to encourage persons to communicate directly with the Commission staff about possible securities law violations.” The SEC fined Health Net $340,000 and ordered it to make reasonable efforts to contact former employees who signed the waiver and release of claims over a period of more than four years, as well as to provide them with a link to the order and a compliance statement (indicating that nothing in the severance agreement restricts such former employees from serving as a whistleblower under SEC regulations).
Prior to these recent SEC actions, the EEOC was the most active government agency in promulgating rules regarding severance agreements. The EEOC has previously held an employee cannot be required to return severance pay before filing a charge (as opposed to a lawsuit, except claims under the Age Discrimination in Employment Act (ADEA)) and that no severance agreement can limit an employee’s right to testify, assist or participate in an EEOC investigation, hearing or proceeding.
Consistent with the SEC and the EEOC, the DOL issued an internal memo to its regional administrators regarding the approval of settlements, dated Aug. 23, 2016. This recent memo may foreshadow DOL legal attacks on severance agreements (as the EEOC already has done). The memorandum highlights five types of provisions that appear to create particular concern:
- A provision that restricts the right of employees to provide information to the government, to participate in investigations or to testify;
- A provision to notify an employee’s employer before filing a complaint or voluntarily communicating with the government;
- A provision requiring employees to confirm they have not provided information to the government or engaged in other protecting activity, or disclaimed any knowledge the employer has violated the law (Requesting the employee to report any knowledge of known or suspected violations of the law independent of a severance agreement may be OK and may have myriad benefits.);
- A provision requiring employees to waive rights to receive a monetary award for participating in government-administered whistleblower programs. Such programs exist not only with the SEC, but also the Occupational Safety and Health Administration (OSHA). It is important to note that other statutes, such as the Foreign Corrupt Practices Act (FCPA) and Internal Revenue Code, provide for rewards for the provision of information related to a violation of those statutes, and agencies administering those statutes could take a similar position; and
- A non-disparagement provision. (The EEOC and National Labor Relations Board [NLRB] have attacked these provisions, as well, not only in severance agreements but also in employer policies and the same concerns would apply to employment agreements.)
Bring Your Employment Documents into Compliance
Although courts may not agree with the positions taken by the SEC, OSHA, the NLRB and EEOC, employers should be cognizant of these issues and consider the risk associated with these agencies’ enforcement positions. Company counsel should review their employment agreements and polices now to avoid being a target of these agencies, with the following practice tips in mind:
- Revise confidentiality provisions to create an exception that allows disclosure to the SEC without requiring notice to the company (either before or after the disclosure).
- Consider creating an exemption for disclosures to other government agencies where the agency requests the employee to refrain from notifying their employer of a governmental investigation or inquiry.
- Insert a carve-out to general release language to allow monetary recovery for certain claims filed with the SEC.
- Revise not only severance agreements, but also employment agreements, non-disclosure agreements and certain employment policies. The same restrictions on severance agreements apply to these documents.
- Monitor developments of federal, state and local government agencies, particularly the DOL, EEOC and NLRB. These agencies have been the most aggressive in scrutinizing employment documents and are the most likely to issue changes in the future.
Eve I. Klein, Jonathan A. Segal and Christopher D. Durham are employment law partners of Duane Morris LLP and Eric W. Ruden is an associate. Klein and Ruden are resident in the firm’s New York office and Segal and Durham are located in Philadelphia. This article is prepared and published for informational purposes only and should not be construed as legal advice. The views expressed in this article are those of the authors and do not necessarily reflect the views of the authors’ law firm or its individual partners.