In a series of press releases throughout September 2023, the Securities and Exchange Commission (SEC) announced enforcement orders against three separate companies for using employment agreements and separation agreements that violated the SEC's whistleblower protection rule. The orders reflect the SEC's increased scrutiny of employment agreements and separation agreements under the whistleblower protection rule.
New level of scrutiny
Under its new level of scrutiny, the SEC is increasingly focused on the language used in employment agreements and separation agreements. The SEC takes issue with language that raises impediments to employee whistleblowing in violation of Rule 21F-17(a) of the Securities Exchange Act of 1943, which prohibits taking any action to impede an individual from communicating directly with the SEC staff about a possible securities law violation.
Specifically, the September orders show that the SEC now takes issue with the following categories of language in employment agreements and separation agreements:
Category 1. Language that prohibits disclosure of confidential corporate information to third parties without an exception for potential SEC whistleblowers. The SEC also noted that an overly broad definition of "confidential information" was problematic. The definition extended to any information gained in the course of employment that could be reasonably expected to be damaging to the company if disclosed to third parties. The SEC found the definition far-reaching and, consequently, impermissibly restrictive of an employee's ability to report to the SEC.
Category 2. Language that requires employees to sign a release in which employees attest that they have not filed a complaint against their employer with any federal agency or government agency in order to receive separation pay or deferred compensation.
Category 3. Language that requires certain departing employees to waive their rights to monetary whistleblower awards in connection with filing claims with or participating in investigations by government agencies.
New penalties
The penalties imposed on the three companies for violating the whistleblower rule under the SEC's new level of scrutiny included cease-and-desist orders, fines ranging from $225,000 to $10 million, and other sanctions.
In two cases, the companies took remedial actions. The SEC noted that it considered the two companies' cooperation and remedial actions in determining the terms of settlement. The remedial actions included revising all versions of domestic releases and similar agreements for compliance with the whistleblower protection rule and communicating with employees who had signed the agreement at issue to clarify the protections afforded to employees by the rule, including their right to report directly to the SEC. In the two cases where remedial efforts were considered, the civil penalties amounted to $225,000 and $375,000 respectively. In the case where remedial efforts were not considered, the civil penalty amounted to $10 million.
Best practices for employers going forward
Employers should ensure that their employment agreements and separation agreements do not contain language that could be construed as raising impediments to employee whistleblowing. Put differently, employers should make certain that the language in their agreements cannot be interpreted as discouraging or disincentivizing employee reporting to the SEC.
Considering the September orders, primary checklist items for employers are:
- Confidentiality clauses and other such restrictions should explicitly provide exceptions for communications with the SEC. Definitions of "confidential information" should do the same.
- Provisions concerning separation pay or deferred compensation should include no contingencies relating to the filing of an employee complaint with government officials.
- Agreements should not include restraints upon employees' receipt of whistleblower awards.
This article is presented for informational purposes only and is not intended to constitute legal advice.
