Severance Agreements Should Not Require Employees to Waive Whistleblower Incentives

By August 12, 2016Uncategorized
signing a severance agreement

The Securities and Exchange Commission (the “SEC”) announced that an Atlanta-based company settled charges that the company violated securities laws by using severance agreements that are impediments to the departing employees’ participation in the SEC’s whistleblower program. As part of the settlement, the company agreed to pay a $265,000 penalty.

The SEC’s order called out two offending provisions in the severance agreements:

  • First, the severance agreements contained a confidentiality provision that required any disclosure of confidential information to be made to the company’s legal department before any disclosure could be made to anyone else. This type of provision is common, but the SEC does not want departing employees to have to decide whether to identify themselves to the company as whistleblowers or potentially lose their severance.
  • Second, the severance agreements required departing employees to waive any whistleblower compensation that they could receive as a result of any complaint made with the SEC or any other administrative agency. The SEC believes that this requirement removed a critically important financial incentive that is intended to encourage whistleblowers to communicate directly with the SEC.

The SEC found that these requirements violate SEC Rule 21F-17, which states that you cannot take any action “to impede an individual from communicating directly with the Commission staff about a possible securities law violation . . . .”

Releases in severance agreements tend to be drafted as broadly as possible, but they also contain a list of claims that are not released, including many claims under federal law. In this situation, the company used a pretty standard release but took one step too many in trying to limit its potential liability.

Bob Muraski is a business attorney based in Bellingham, Washington.

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