Time to Review Your Severance Agreements

In August 2016, the SEC issued cease-and-desist orders against two different companies for using severance agreements which required exiting employees to waive their ability to obtain monetary awards under the SEC’s whistleblower program.

According to the SEC’s order regarding BlueLinx Holdings Inc., beginning prior to August 12, 2011 and continuing through the present, BlueLinx entered into severance agreements with departing employees. While the agreements were not uniform, most contained language prohibiting the departing employees from divulging confidential information, unless compelled to do so by law or legal process. In or about June 2013, BlueLinx reviewed and revised each of its outstanding severance agreements and added provisions which (i) required such former employees to waive their rights to monetary recovery should they file a charge or complaint with the SEC or other federal agencies, and (ii) required such former employees to notify the company’s legal department prior to disclosing any financial or business information to any third parties.

According to the SEC’s order regarding Health Net, Inc., beginning prior to August 12, 2011 and continuing through October 22, 2015, Health Net entered into severance agreements with departing employees. In August 2011, after the whistleblower rules were adopted, Health Net updated its form of severance agreement to add language which prohibited former employees from filing an application for, or accepting, a whistleblower award from the SEC. This language was contained in severance agreement entered into from approximately August 2011 to June 2013. In June 2013, Health Net updated its form of severance agreement to remove the SEC-specific language; however, Health Net retained language that removed the financial incentive for reporting information. On October 22, 2015, Health Net updated its form of severance agreement and struck the restrictive language related to monetary awards.

The SEC charged each of BlueLinx and Health Net with violating Rule 21F-17 under the Exchange Act. Rule 21F-17, adopted pursuant to the Dodd-Frank Act, provides that “[n]o 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.”

BlueLinx consented to the SEC’s cease-and-desist order without admitting or denying the findings. BlueLinx agreed to include in all of its severance agreements after the date of the order language which makes it clear that employees may report possible securities law violations to the SEC and other federal agencies without BlueLinx’s prior approval and without having to forfeit any resulting whistleblower award. In addition, BlueLinx agreed to make reasonable efforts to contact former employees who had executed severance agreements from August 12, 2011 through the present to notify them that BlueLinx does not prohibit former employees from providing information to the SEC staff without notice to BlueLinx or from accepting SEC whistleblower awards. In addition, BlueLinx agreed to pay the SEC a civil penalty of $265,000.

Health Net also consented to the SEC’s cease-and-desist order without admitting or denying the findings. Health Net agreed to make reasonable efforts to inform former employees who signed severance agreements from August 12, 2011 through October 22, 2015 that Health Net does not prohibit former employees from seeking and obtaining a whistleblower award from the SEC under Section 21F of the Exchange Act. In addition, Health Net agreed to pay the SEC a civil penalty of $340,000.

In light of the above orders, companies should review new and existing severance agreements that they have or enter into with former employees to make sure that such documents do not restrict such former employees’ ability to provide information to the SEC or from accepting SEC whistleblower awards. The mere existence of such restrictive language in severance agreements in and of itself could be found to be a violation of Section 21F of the Exchange Act.