Employers Cannot Use Severance Agreements to Muzzle Whistleblowers, According to SEC

Severance Agreements Requiring Waiver of Ability to Receive Whistleblower Awards Are Against Public Policy

In two decisions, issued less than a week apart, the SEC (Securities and Exchange Commission) made clear that the use of severance agreements to silence whistleblowers will not be tolerated.

A pair of August 2016 administrative orders, issued in In the Matter of BlueLinx Holdings, Inc. and In the Matter of Health Net, Inc., found two companies in violation of an SEC Rule that prohibits anyone from taking action to prevent a whistleblower from communicating with the SEC. Relying on the Dodd-Frank Wall Street Act of 2010, whose purpose is “to encourage whistleblowers to report possible violations of the securities laws by providing financial incentives, prohibiting employment-related retaliation, and providing various confidentiality guarantees” the SEC found that severance agreements requiring whistleblowers to waive receipt of whistleblower bounties are against public policy.

Confidentiality, Non-disclosure, and Non-compete Clauses Are Still OK

Broadly speaking, a severance agreement is a contract between an employer and an employee that spells out the rights and responsibilities of both parties in the event of job termination. The agreement usually specifies a severance package that may include pay and benefits, and conditions under which pay and/or benefits may be withheld. Employers may require that employees sign a release as a condition of receiving a severance package.

Employers, seeking to minimize the risk of future litigation from lawsuits claiming wrongful termination, sexual harassment, or sex or race based discrimination, often present soon-to-be-terminated employees with severance agreements containing clauses that waive the employee’s right to bring claims against the company. These agreements often include confidentiality and non-disclosure clauses designed to protect the company’s confidential information, non-disparagement clauses that protect the company’s reputation, and non-compete and/or non-solicitation clauses to protect the company's bottom-line.

When an employer suspects that a whistleblower is on their payroll, a cheap and easy way to eliminate a potential SEC investigation is terminate the suspected whistleblower and offer a severance package that prohibits the whistleblower from collecting a bounty for assisting with an SEC investigation. For example, the release might affirm the potential whistleblower’s right to file a charge with the SEC, but will state that the employee “waives the right to any monetary recovery in connection with such complaint or charge…” Thus, the whistleblower is not explicitly prohibited from communicating with the SEC, but would have no incentive to do so. However, in the cases of BlueLinx and Health Net, the SEC found that provisions like these went too far.

Dodd-Frank Intended to Encourage Whistleblowers to Report Potential Violations

The releases in BlueLinx and Health Net required outgoing employees to waive the ability to receive a whistleblower award. Finding these clauses to be against public policy, the SEC relied on the Dodd-Frank Act which states that the rights and remedies available to whistleblowers may not be waived by “any agreement, policy form, or condition of employment.” The intent of Dodd-Frank is further reinforced by SEC Rule 21F-17 which states that “no person may take any action to impede an individual from communicating with Commission staff about a possible securities law violation…”

The decisions in BlueLinx and Health Net were intended by the SEC to send a message to employers that trying to eliminate whistleblower lawsuits through the creative use of severance agreements would not be tolerated. However, as the SEC's regulation of the unscrupulous use of severance agreements continues, companies, no doubt, will devise other methods to try to circumvent the intent of the Dodd-Frank Act.

For more information about whistleblower lawsuits, contact the Kansas City whistleblower attorneys at Brady & Associates for a free and confidential evaluation of your case, call us at (913) 696-0925, or complete our online information form.