Blowing the Whistle on Anti Whistle blower Severance Agreements

December 7, 2016

The Securities and Exchange Commission is showing its commitment to keeping the lines of communication open between the SEC and whistleblowers willing to report wrongdoing. The SEC recently announced stiff penalties for two companies that included language in separation agreements that required employees to waive financial rewards they might be eligible for if they disclose employer wrongdoing to the SEC.

In a recent administrative proceeding against BlueLinx Holdings Inc., the SEC issued an order against the company for issuing severance agreements that could potentially stifle whistleblowing activities. As reported in an August 10, 2016 SEC press release, “BlueLinx’s restrictive language forced employees leaving the company to waive possible whistleblower awards or risk losing their severance payments and other post-employment benefits.” Along with changes to the severance agreement language and employment policies, the company agreed to pay a $265,000 penalty.

Less than a week later, the SEC announced a similar result in an action against a California-based health insurance provider. According to the order, Health Net Inc. required outgoing employees to sign a waiver and release of claims. Although the release did not bar them from taking part in any government investigations of the company, it prohibited them from accepting a financial reward they otherwise would be eligible for if the government made a recovery based on their tips. Some 600 employees signed these agreements over a two-year period. Health Net agreed to pay a $365,000 penalty and agreed to make reasonable efforts to inform former employees who signed the severance agreements that Health Net does not prohibit them from seeking and obtaining a whistleblower award from the SEC.

These most recent penalties are higher than the $130,000 the SEC fined KBR Inc. in the Commission’s first such enforcement action announced on April 1, 2015.

Preventing a Chilling Effect

As discussed in a prior blog post, efforts by Congress and the SEC to encourage and protect whistleblowers who come forward to report corporate fraud and deception are proving successful. Tips reported to the SEC last year reached nearly 4,000, a 30% jump from 2012.

Chief among federal whistleblower protection statutes is the Dodd-Frank Wall Street Reform & Consumer Protection Act. Rule 21F-17 of the Act prohibits actions by an employer that restrict employees from reporting a violation of securities laws to the SEC:

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.

In an April 2015 order, the SEC made clear that this prohibition includes employee confidentiality agreements. KBR had been requiring certain employees to sign confidentiality agreements that indicated that the company would discipline or even terminate employees who shared details from internal investigations with the Commission. The confidentiality agreements also required employees to get clearance from KBR’s legal department before going to the Commission.

The Commission fined KBR, and KBR revised its confidentiality agreements. When it announced the enforcement action, the Commission stated that going forward it would view any company’s “blanket prohibition” against witnesses discussing the substance of the interview has a potential “chilling effect” on whistleblowers’ willingness to report illegal conduct to the Commission.

Employees Must Be Vigilant

Because reports of retaliation against whistleblowers appear in the news regularly, workers have a growing awareness of their employment rights. As companies seek to quash whistleblowing activities, they may pursue subtle and more insidious means such as restrictive severance agreement language. Consequently, employees must remain alert to spotting these practices.

The attorneys in Outten & Golden’s Whistleblower & Retaliation Practice Group are experienced in all aspects of federal whistleblower laws and negotiating employee severance packages, and will continue to share news and outcomes in this area.

(*Prior results do not guarantee a similar outcome.)