August 19, 2016

Two New SEC Orders Further Limit Employers' Ability to Secure Employee Releases and the Breadth of Confidentiality Agreements

The Securities and Exchange Commission (SEC) has issued two orders challenging employee confidentiality agreements and indicating that companies must not condition employees’ receipt of severance payments and other post-employment benefits on agreeing to refrain from exercising their rights as whistleblowers and receiving awards for doing so. On August 16, 2016, the SEC issued an order in an enforcement action against Health Net Inc. finding improper its inclusion of severance agreement language that allegedly required terminated employees to waive their ability to obtain monetary awards from the agency’s whistleblower program. The SEC’s press release quoted Associate Director Antonia Chion as stating, “Financial incentives in the form of whistleblower’s awards, as Congress recognized, are integral to promoting whistleblowing to the Commission,” and that severance agreements that “strip away those financial incentives” were viewed as “directly targeting the Commission’s whistleblower program.”

The Health Net Inc. action follows an August 10 enforcement action filed by the SEC against Atlanta-based building products maker BlueLinx Holdings Inc., in which the agency took issue with severance agreements containing overly broad confidentiality provisions that omitted any “exemption permitting an employee to provide information voluntarily to the Commission or other regulatory or law enforcement agencies.” Both cases were filed on a “no-admit, no-deny” basis under settled cease-and-desist orders charging the companies with violating Rule 21F-17, which required Health Net and BlueLinx to pay civil penalties of $340,000 and $265,000, respectively.

These aggressive enforcement actions by the SEC continue the trend of governmental agencies vigorously opposing agreements and policies that discourage or prevent employees from reporting potentially illegal conduct. In light of these developments, companies should review agreements and policies that may discourage reporting to governmental agencies and consider including language in such agreements to clarify that employees may report to federal or state governments and may participate in government investigations or inquiries. Specifically, companies should make sure their employment agreements allow employees and former employees to make reports to employment and other governmental agencies and to participate in investigations conducted by government agencies. Employers should delete or modify provisions that require employees and former employees to forgo the receipt of monetary or other relief in the event they do make a report to a governmental agency or become involved in a governmental investigation.

Employers are well-advised to review their employee agreements and consider whether provisions should be deleted or modified in light of these new SEC orders.

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