We are pleased to provide a posting from our colleague, Holly L. Griffin, an attorney in Gunster’s Labor and Employment practice group.
Within the course of one week, the SEC took administrative action against two companies for language contained within severance agreements which restricted employee rights to obtain a monetary award for reports of potential law violations to the SEC. The SEC took aim at two types of provisions which commonly appear in severance agreements: the confidentiality clause and the waiver of rights.
In one of the cases, the company required all employees accepting severance pay to sign an agreement that contained a clause prohibiting disclosure of company confidential information and trade secrets, except when the employee is compelled by law to disclose the information. In the event the employee was required to disclose company confidential information, the agreement required the employee to provide notice to the company. The SEC determined that the confidentiality agreement put former employees between a rock and a hard place if they wanted to report potential law violations; they could either identify themselves as a whistleblower to the company by providing notice, or risk breaching the agreement and forfeiting severance by disclosing confidential information.
In both matters, the companies required all employees accepting severance to sign an agreement that contained a waiver of rights. Although the severance agreements did not prohibit the employees from reporting or participating in an investigation into a potential law violation, they explicitly prohibited the employees from receiving monetary compensation for such reports. The SEC found both companies in violation of an SEC Rule which prohibits public companies from taking action which impede a whistleblower from communicating with the SEC regarding possible law violations. Congress enacted the “Dodd-Frank Act with the stated purpose of encouraging whistleblowers to report potential law violations to the SEC, by offering financial incentives or awards for reports. The SEC determined that requiring employees to waive their right to financial recovery undermines the public policy purpose behind the Dodd-Frank Act and violates SEC rules.
Both companies were required to notify former employees of the ruling and to pay monetary civil penalties, totaling hundreds of thousands of dollars each. One company was also required to amend its severance agreements to include a section titled “Protected Rights,” which notified employees of the right to report any suspected law violation to a governmental agency and to receive an award for providing such information.
What it means
It is difficult to predict the potential reach and ramifications of the government’s decision to attack a relatively standard severance agreement, but it could have a far reaching effect on employer confidentiality provisions and release agreements. In addition to federal securities laws, there are many other state and federal employment laws which include protections for whistleblowers who report potential law violations. The company’s confidentiality statement in this case was not uncommon, as most employers have strict confidentiality provisions in employment agreements, employee policies, as part of their investigation processes, and in severance agreements for obvious and legitimate reasons. It is also common for companies to require a waiver of all rights and monetary compensation as part of an agreement to pay severance to a departing employee. Of particular concern is the SEC’s requirement that one of the companies include a section titled “Protected Rights,” containing broadly worded language regarding the receipt of awards for information from any government agency for a report of suspected law violations. At this time, it is unclear whether other governmental agencies, such as the Department of Labor or the Equal Employment Opportunity Commission, will follow the SEC’s lead in attacking these broad provisions, but companies should be prepared for the possibility and make the necessary adjustments to address it.