In orders issued just six days apart last month, the U.S. Securities and Exchange Commission (SEC) rejected language in severance agreements requiring employees to waive rights to receive additional monetary recovery, particularly awards for providing information to government enforcement agencies. The Commission’s actions underscore its continuing scrutiny of any provisions that might impede the flow of information to the government, even where there is no evidence of any such effect. They also drive home that employers must continue to stay abreast of legal developments and modify their policies, practices, and agreements promptly.
In the two matters, both companies used language in severance or settlement agreements that allowed employees to provide information to the SEC and other government agencies, but also required employees to waive rights to any monetary recovery in connection with bringing a complaint or charge with an administrative agency. The SEC also imposed fines against the two employers in the amounts of $265,000 and $340,000, respectively. The Commission stated in both instances that such language interferes with an employee’s right to communicate, unimpeded, with the Commission, in violation of Exchange Act Rule 21F-17, which provides that:
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.
Rule 21F-17(a), implemented following the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, is intended to encourage the reporting of potential unlawful conduct to the SEC. Although waiving additional monetary recovery does not directly impede such reporting, the SEC takes the position that such language removes the “critically important” financial incentive—in particular, the bounty available under certain circumstances—intended to encourage whistleblowers to report to the Commission. Those bounties are paid from a fund that Congress has established for that purpose, and are not paid by the companies from which the SEC recovers money for shareholders.
Although not approving the language as “safe harbor” language for general use, the Commission did approve the following language in one of the cases:
Protected Rights. Employee understands that nothing contained in this Agreement limits Employee’s ability to file a charge or complaint 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 federal, state, or local governmental agency or commission (“Government Agencies”). Employee further understands that this Agreement does not limit Employee’s ability to communicate with any Government Agencies or otherwise participate in any investigation or proceeding that may be conducted by any Government Agency, including providing documents or other information, without notice to the Company. This Agreement does not limit Employee’s right to receive an award for information provided to any Government Agencies.
The Order was silent on what language, if any, employers may still use to address their interest in preventing employees from filing actions that the employee specifically waived—and legally can be waived—in the agreement. Note that there are restrictions on the waiver and release of claims under Sarbanes-Oxley and Dodd-Frank.
These two orders from the SEC are just the latest examples of the Commission’s initiative to scrutinize and limit sharply the provisions of employer agreements, policies, and procedures. As we have previously reported, the SEC continues to make good on its warnings to employers that it will take strong action against employers that use certain provisions in employment agreements that could affect adversely the flow of information that assists the Commission’s enforcement efforts.
In the wake of these decisions, employers once again should take time to review and revise policies, practices, and employment agreements, including confidentiality, severance, separation and similar agreements, before the SEC comes knocking. In particular regarding recovery-limiting language, employers should consider carefully whether to use it at all, given that an enforceable waiver cuts off additional recovery from the employer. If they decide to do so, employers should add language making clear that any limitation does not limit their employees’ right to receive awards for information provided to government agencies.
The Ethics Compliance, Investigations and Whistleblower Response Practice Group will continue to cover the SEC’s activities regarding the language that may be used in severance agreements and other employment-related contracts.
