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How Certain Severance Agreement Provisions Can Impact Whistleblower Claims


If you are offered a severance package by your employer, beware of the conditions your employer may place on receiving that compensation. Most companies will require employees to sign a general release and waiver of claims before they can receive any severance pay or benefits. This means that you must give up your rights to bring a legal action against your employer for employment related issues. For that reason, before you sign a severance agreement, it would be wise to consult an experienced employment lawyer to discuss your rights and options. As the administrative actions of the SEC demonstrate, severance agreements can have an improper impact on potential whistleblower claims.

SEC takes issue with restrictive language in severance agreements

This year, the Securities and Exchange Commission has taken action against two companies who were routinely using severance agreements that contain restrictive language that denies employees their rights to monetary awards for whistleblowing to the SEC. These restrictive provisions commonly included in severance agreements come in the form of "waiver of rights" and "confidentiality clauses."

Between a rock and a hard place

One company had begun requiring its employees who accepted severance pay to sign a severance agreement containing a clause that prohibited disclosure of company confidential information and trade secrets, unless required by law to do so. If the employee was ever required to disclose such information, the severance agreement also required that the employee provides notice of that disclosure to the company.

The SEC took issue with this type of provision because it obviously put former employees in a tough position. If those employees wanted to report potential SEC violations, they would either be required to expose themselves to the company as whistleblowers or risk being in breach of the severance agreement and forfeiting their severance pay by disclosing confidential information.

Waiver of rights to monetary compensation

Another provision included in these objectionable severance agreements was a waiver of rights. Specifically, employees were allowed to report and participate in an investigation into a potential SEC violation. However, they were explicitly prohibited from receiving any monetary compensation for doing so. This provision was a direct violation of a SEC rule prohibiting public companies from taking any actions that would impede a whistleblower from communicating with the SEC regarding a potential violation. It also violates the “Dodd-Frank Act" which was enacted for the purpose of encouraging whistleblowers to report potential violations through financial incentives. Therefore, as the SEC determined, requiring employees to waive their right to monetary compensation actually undermines the public policy purpose behind the Dodd-Frank Act and violates SEC rules.

The consequences for these companies

Ultimately, in addition to paying significant civil penalties, these two companies were required to notify former employees of the ruling, as well. One company was also required to amend its severance agreements to include a section titled “Protected Rights,” notifying employees of the right to report any suspected violations to a governmental agency and to receive a monetary award for doing so.

If you feel you have been the victim of discrimination or retaliation, or if you have any questions regarding your employment rights, please contact Michel | King , either online or by calling us at (205) 265-1880.

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