United States: SEC Intensifies Scrutiny Of Employment-Related Agreements

The cease-and-desist orders entered in August 2016 by the United States Securities and Exchange Commission (SEC) demonstrate the SEC's increased scrutiny of confidentiality and release provisions contained in severance and other employment-related agreements and have potential implications for employers nationwide. Specifically, the SEC sanctioned companies with severance agreements that contained a waiver or release by the former employee of any right to monetary recovery arising from a governmental investigation (such as an SEC whistleblower action) and which required former employees to notify the company if they were required by law to disclose confidential information.

Section 21F of the Securities Exchange Act

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted, which amended the Securities Exchange Act (the Act) by, among other things, adding Section 21F, "Whistleblower Incentives and Protection." Section 21F requires the SEC to pay awards to whistleblowers who provide the SEC with original information about violations of the federal securities law.

To enforce Section 21F, the SEC adopted a set of rules that includes Rule 21F-17, which became effective in August 2011 and provides in relevant part:

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.

The SEC's August 2016 cease-and-desist orders in BlueLinx Holdings Inc. and Health Net, Inc. involve language in severance agreements the SEC found to violate Rule 21F-17.

BlueLinx Holdings Inc.

On August 10, 2016, the SEC issued a cease-and-desist order in BlueLinx Holdings Inc. regarding language used by BlueLinx in severance agreements with former employees that the SEC found to violate Rule 21F-17. Specifically, the severance agreements used by BlueLinx had a confidentiality clause which stated:

[The Employee shall not] disclose to any person or entity not expressly authorized by the Company any Confidential Information or Trade Secrets ... . Anything herein to the contrary notwithstanding, you shall not be restricted from disclosing or using Confidential Information or Trade Secrets that are required to be disclosed by law, court or other legal process; provided, however, that in the event disclosure is required by law, you shall provide the Company's Legal Department with prompt written notice of such requirement in time to permit the Company to seek an appropriate protective order or other similar protection prior to any such disclosure by you.

The SEC held that by requiring departing employees to notify the company's Legal Department prior to disclosures of information to third parties without exempting the SEC from the scope of this restriction, BlueLinx "forced those employees to choose between identifying themselves to the company as whistleblowers or potentially losing their severance pay and benefits."

The SEC also held that BlueLinx had another clause in its severance agreements that violated Rule 21F-17. This clause stated:

Employee further acknowledges and agrees that nothing in this Agreement prevents Employee from filing a charge 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 administrative agency if applicable law requires that Employee be permitted to do so; however, Employee understands and agrees that Employee is waiving the right to any monetary recovery in connection with any such complaint or charge that Employee may file with an administrative agency. (emphasis added).

The SEC held that by requiring employees to forgo any monetary recovery arising out of an administrative agency investigation, BlueLinx "removed the critically important financial incentives that are intended to encourage persons to communicate directly with the Commission staff about possible securities law violations."

For these violations, the SEC fined BlueLinx $265,000 and ordered BlueLinx to make reasonable efforts to contact former employees who signed any of its severance agreements in the preceding five years and provide those former employees with the SEC's order. Additionally, the SEC required BlueLinx prospectively to modify its severance agreements and any other agreements with employees or former employees to ensure any prohibitions on the disclosure of confidential information would not limit or restrict the individual's right to communicate with or provide information to government agencies (including participating in agency investigations) without notice to BlueLinx, and, furthermore, such agreements would not waive an individual's right to receive a monetary reward for information provided to a government agency.

Health Net, Inc.

On August 16, 2016, the SEC issued a cease-and-desist order in Health Net, Inc. regarding language used by Health Net in severance agreements with former employees that the SEC found to violate Rule 21F-17. In August 2011, Health Net amended its severance agreement to specify that, while not prohibited from participating in a governmental investigation, the former employee was prohibited from filing an application for, or accepting, a whistleblower award from the SEC. In June 2013, Health Net removed this language from its severance agreement, but retained a restriction stating the employee "waives any right to any individual monetary recovery ... in any proceeding based on any communication by Employee to any federal, state or local government agency or department."

The SEC acknowledged that it was unaware of any instance in which a former Health Net employee who executed a severance agreement refrained from communicating directly with the SEC about potential securities violations or any instance in which Health Net took action to enforce the provisions at-issue. Nonetheless, the SEC found these provisions "directly targeted the SEC's whistleblower program by removing the critically important financial incentives that are intended to encourage persons to communicate directly with the Commission staff about possible securities law violations." The SEC fined Health Net $340,000 and ordered Health Net to make reasonable efforts to contact former employees who signed the waiver and release of claims over a period of more than four years, as well as to provide them with a link to the order and a compliance statement (indicating that nothing in the severance agreement restricts such former employees from serving as a whistleblower under SEC regulations).

Other Developments

Consistent with the SEC (and Equal Employment Opportunity Commission), the U.S. Department of Labor (DOL) issued an internal memo to its regional administrators regarding the approval of settlements, dated August 23, 2016. This recent memo may foreshadow DOL legal attacks on severance agreements (as the EEOC already has done). The memorandum highlights five types of provisions that appear to create particular concern:

  • A provision that restricts right of employees to provide information to the government, to participate in investigations or to testify;
  • A provision to notify an employee's employer before filing a complaint or voluntarily communicating with the government;
  • A provision requiring employees to confirm they have not provided information to the government or engaged in other protecting activity, or disclaimed any knowledge the employer has violated the law (Requesting the employee to report any knowledge of known or suspected violations of the law independent of a severance agreement may be OK and may have myriad benefits.);
  • A provision requiring employees to waive rights to receive a monetary award for participating in government-administered whistleblower programs. Such programs exist not only with the SEC but also the Occupational Safety and Health Administration (OSHA). It is important to note that other statutes, such as the Foreign Corrupt Practices Act and Internal Revenue Code, provide for rewards for the provision of information related to a violation of those statutes, and agencies administering those statutes could take a similar position; and
  • A non-disparagement provision. (The EEOC and National Labor Relations Board (NLRB) have attacked these provisions, as well, not only in severance agreements but also in employer policies and the same concerns would apply to employment agreements.)

What This Means for Employers

As many employers frequently utilize severance agreements as a means to finally resolve disputes or potential ones with departing employees, employers should review their agreements and consider whether they want to modify them to address these recent developments to reduce the risk of challenge to an agreement's enforceability.

The same issues also apply to employment agreements, non-disclosure agreements and certain employment policies. As such, employers may also want to review their agreements and policies to revise them to minimize risk of unenforceability.

Although courts may not agree with the positions taken by the SEC, OSHA, the NLRB and EEOC, employers should be cognizant of these issues and consider the risk associated with these agencies' enforcement positions.

The good news is there are ways to address employers' concerns to keep information confidential, minimize disparagement, foster cooperation and notice, and reduce risk of suit after execution of a release and covenant not to sue within the confines of the positions being espoused by these administrative agencies. Each employer may want to work with employment counsel to evaluate risk and select the option best suited for its workplace or a particular situation.

If you have any questions about this Alert, please contact any of the attorneys in our Employment, Labor, Benefits and Immigration Practice Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.