Severance agreements have long been used to reach amicable – or at the very least, mutually beneficial – resolutions to an individual’s employment with a firm. By definition, a severance agreement is a new agreement that stands apart from any previous agreements between an employer and an employee, and the employee and employer both must receive a benefit in order for the agreement to be enforceable. Usually, what the employee receives is extended compensation and benefits beyond the end of employment, while the employer receives some sort of release from potential claims brought by the employee such as wrongful termination or claims for back pay.

Such agreements are both common and generally legal, but a new trend has emerged of companies requiring employees to refrain from providing whistleblowing information to governmental authorities such as the SEC regarding civil and criminal violations by the company. As an employee, you should understand that such provisions are generally illegal and unenforceable, meaning you should not hesitate to speak to a whistleblowing attorney if you believe a past or current employer has violated federal securities laws.

The SEC Fines Companies Who Prohibit Whistleblowing

In 2015 and 2016, the SEC began a significant crackdown on companies that put language in severance agreements requiring past employees to forfeit their compensation if they report violations of the law to federal authorities. The language of these agreements were worded so that it would appear that the employee was preemptively giving up any right to receive a whistleblowing reward as a condition of receiving severance, but the SEC found that such provisions were essentially tantamount to retaliation. As a result, companies such as Health Net, KBR, and BlueLinx were fined hundreds of thousands of dollars for including language requiring employees to give up their rights to whistleblow.

Other Disallowed Prohibitions on Whistleblowing Actions

In a memo released in late 2016, the SEC further explained the actions it was taking to crack down on companies who create official policies that target employees who act to assist the government in exposing illegal conduct. According to the memo, companies may not include provisions in severance agreements and other official policy documents which:

  • Require an employee to represent that he or she has not assisted in any investigation involving the registrant
  • Prohibit any and all disclosures of confidential information, without any exception for voluntary communications with the SEC concerning possible securities laws violations
  • Require an employee to notify and/or obtain consent from the registrant prior to disclosing confidential information, without any exception for voluntary communications with the SEC concerning possible securities laws violations
  • Purport to permit disclosures of confidential information only as required by law, without any exception for voluntary communications with the SEC concerning possible securities laws violations

Retaliation Should Never Be Tolerated

The fact that major companies are continuing to attempt to use retaliatory tactics against whistleblowers in this day and age is alarming, and retaliation should never be tolerated. Fortunately, the SEC has made it clear that it plans to continue taking a hard line against any retaliatory tactics, including those couched in severance agreements. That said, it is important for whistleblowers to protect themselves by working with an experienced whistleblower attorney who can guide them through the whistleblowing process.  

How to Pursue A SEC Whistleblower Award

The SEC is actively looking for more individuals to bring information to it which can be rewarded with a whistleblowing award. Bringing whistleblower information to the SEC can be a complex process, but it can also be tremendously lucrative, and the right thing to do to help keep our financial markets fair.

At Kreindler & Associates, we work with employees and insiders to help them report wrongdoing, and obtain whistleblowing awards. To learn more about how Kreindler & Associates can help in your SEC whistleblower matter, see here.