30 Aug SEC Seeks to Ban Waivers of Whistleblower Rights in Severance Agreements

Two weeks ago, as many were enjoying their summer vacation, the Securities and Exchange Commission exacted a $340,000 penalty from a company called Health Net Inc. Why? Because in firing employees and asking them to sign termination agreements, in order for the departing employee to get severance and other benefits, the company insisted that they waive their right to file a complaint or get any money under the SEC whistleblower program. The program, adopted in 2010 under the Dodd-Frank Act, offers financial rewards to those reporting fraud or other wrongful behavior.

In 2011 the SEC adopted a rule that prohibits taking any action to impede an individual from communicating directly with the SEC about possible securities law violations. Health Net had amended its contracts to say they can communicate but can’t get financial benefit. The SEC, which brought this action, believes that such a provision violated its rule. The company did not admit or deny liability in the settlement. While this is not technically binding legal precedent, it is a shot across the bow to any company considering acting similarly and certainly reflects the SEC staff’s view that provisions in agreements that “chill” employee whistleblowing are problematic.

Is this good? Encouraging whistleblowing for bad behavior may be a good policy goal. But query: if a company and departing employee wish to enter into an agreement upon departure where a certain financial settlement to the employee is acceptable to him or her and they choose to accept it, is it right to interfere with that? One wonders if companies will begin to rethink the manner in which they offer severance in situations where the employee might be considered a risk to whistleblow if they still could bring a claim after obtaining severance. Prohibiting a waiver of whistleblower rights as a condition to employment does sound right to me. But upon departure? Maybe that’s worth a discussion.