As many employers frequently utilize severance agreements as a means to finally resolve disputes or potential ones with departing employees, employers should review their agreements and consider whether they want to modify them to address these recent developments to reduce the risk of challenge to an agreement’s enforceability.

The cease-and-desist orders entered in August 2016 by the United States Securities and Exchange Commission (SEC) demonstrate the SEC’s increased scrutiny of confidentiality and release provisions contained in severance and other employment-related agreements and have potential implications for employers nationwide. Specifically, the SEC sanctioned companies with severance agreements that contained 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 which required former employees to notify the company if they were required by law to disclose confidential information.

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 August 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. Specifically, the severance agreements used by BlueLinx had a confidentiality clause which 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 BlueLinx 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 BlueLinx, 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 August 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. 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 Health Net 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).

Other Developments

Consistent with the SEC (and Equal Employment Opportunity Commission), the U.S. Department of Labor (DOL) issued an internal memo to its regional administrators regarding the approval of settlements, dated August 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 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 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.)

What This Means for Employers

As many employers frequently utilize severance agreements as a means to finally resolve disputes or potential ones with departing employees, employers should review their agreements and consider whether they want to modify them to address these recent developments to reduce the risk of challenge to an agreement’s enforceability. 

The same issues also apply to employment agreements, non-disclosure agreements and certain employment policies. As such, employers may also want to review their agreements and policies to revise them to minimize risk of unenforceability. 

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. 

The good news is there are ways to address employers’ concerns to keep information confidential, minimize disparagement, foster cooperation and notice, and reduce risk of suit after execution of a release and covenant not to sue within the confines of the positions being espoused by these administrative agencies. Each employer may want to work with employment counsel to evaluate risk and select the option best suited for its workplace or a particular situation.   

For Further Information

If you have any questions about this Alert, please contact any of the attorneys in our Employment, Labor, Benefits and Immigration Practice Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.