3 Severance Agreement Time-bombs

By John Alan Doran

Yesterday the SEC entered a cease and desist agreement with BlueLinx Holdings, fining the company $265,000.00 for including unlawful confidentiality and waiver provisions in its severance agreements.  BlueLinx used a variety of severance agreements or letters with its departing employees.  Most of these prohibited the employee from sharing the company’s confidential information with third parties.  But, in response to SEC’s 2011 rule prohibiting public companies from stopping employees from whistleblowing to the SEC, BlueLinx changed its agreements to allow employees to file charges with government agencies including the SEC.  The amended agreements provided, however, that the employee waives any right to monetary recovery arising out of any charges filed with any government agencies.  The amended agreements also required an employee to notify the BlueLinx legal department prior to making any disclosures of confidential information.  Whoopsie!

According to the SEC, BlueLinx broke the law in at least three ways.  First, by requiring potential SEC whistleblowers to notify the BlueLinx legal department prior to taking issues to the SEC, BlueLinx forced employees to choose between self-identifying as a whistleblower or potentially forfeiting the severance benefit.  Second, by requiring employees to forgo monetary awards for whistleblowing to the SEC, BlueLinx directly interfered with the statutory incentives created to encourage whistleblowing under Dodd-Frank and under SEC Rule 21F-17 ( https://www.law.cornell.edu/cfr/text/17/240.21F-2 ).  Third, BlueLinx’s use of sweeping confidentiality covenants sans proper carve-outs for protected whistleblowing activity defeated the very purpose of the whistleblower laws.

While this specific action applies only to SEC-regulated companies, we can certainly expect the NLRB, EEOC, OSHA, and others to take the same position with respect to such provisions, and some have already done so.  So, if you haven’t revisited your severance agreements to address these three issues, now’s the time.