Do Your Severance Agreements Pass Muster?

Severance Agreements Attempting to Muzzle Departing Employees Can Backfire

Businesses don’t want employees badmouthing them on the way out the door. However, attempts to muzzle former staff members can often backfire. Two federal regulators, the Securities and Exchange Commission (SEC) and the Equal Employment Opportunity Commission (EEOC), are increasingly cracking down on the use of severance agreements that may stifle whistleblowers.

Separation Agreements

Separation agreements often play an important role in helping to ensure peace when an employee leaves his/her employment. In essence, the employer agrees to provide compensation or other benefits in exchange for the departing worker agreeing not to sue his employer. If they are drafted to comply with all applicable state and federal laws, the agreements can offer valuable protection for employers.

SEC Enforcement Actions

As we have previously discussed, Rule 21F(h)(1) of the Dodd-Frank Act that 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.” The SEC continues to focus on whether employers are using confidentiality, severance, and other kinds of agreements to interfere with an employee’s ability to report potential wrongdoing to the SEC.

In 2016, Anheuser-Busch paid $6 million in fines to resolve allegations that it used a separation agreement to prohibit an employee from continuing to provide the SEC with information regarding violations of the Foreign Corrupt Practices Act. Most recently, the SEC settled an enforcement action against BlackRock Inc. According to the SEC, the New York-based asset manager agreed to pay a $340,000 penalty to resolve charges that it improperly used separation agreements in which exiting employees were forced to waive their ability to obtain whistleblower awards.

The SEC order states that more than 1,000 departing BlackRock employees signed separation agreements containing language stating that they “waive any right to recovery of incentives for reporting of misconduct” in exchange for monetary separation payments. BlackRock added the waiver provision in October 2011 after the SEC adopted its whistleblower program rules and continued using it in separation agreements until March 2016.

EEOC Enforcement Actions

The EEOC has also taken aim at separation agreements in recent years. Its position is that if a waiver of future claims against the employer can “reasonably” be interpreted as prohibiting or discouraging an employee from filing a charge or cooperating in an EEOC investigation, then the waiver is “overbroad, misleading and unenforceable.”

By way of example, in EEOC v. Baker & Taylor, Inc., the EEOC alleged that certain provisions of the company’s separation agreement violated Title VII of the Civil Rights Act of 1964 by conditioning severance on employees executing contracts that waived their right to file a charge, testify, assist, or participate in any manner in an investigation, hearing, or proceeding under Title VII. The EEOC charge resulted in a settlement under which Baker & Taylor agreed to revise its severance agreement to include a disclaimer that the agreement stating that nothing in the agreement should be construed to prohibit the employee from filing a charge with or participating in any investigation or proceeding conducted by the EEOC or a comparable state or local agency

Additional enforcement actions are likely on the horizon. In its latest Strategic Enforcement Plan for Fiscal Year 2017-2021, the agency stated that it plans to focus on policies and practices that limit substantive rights, discourage or prohibit individuals from exercising their rights under employment discrimination statutes, or impede EEOC’s investigative or enforcement efforts. Specifically, the EEOC will focus on “overly broad waivers, releases, and mandatory arbitration provisions (e.g., waivers or releases that limit substantive rights, deter or prohibit filing charges with EEOC, or deter or prohibit providing information to assist in the investigation or prosecution of discrimination claims.”

Do Your Severance Agreements Pass Muster?

If your company uses standardized severance agreements, it is advisable to review them to ensure that they comply with the positions adopted by both the EEOC and SEC. It is also a good idea to check that any “boilerplate” provisions that are inserted into individualized severance agreements do not contain any language that could be construed as stifling whistleblowers.

Do you have any questions regarding severance agreements? Would you like to discuss the matter further? If so, please contact me, Sean Dias, at 201-806-3364.