Companies routinely use separation agreements with departing employees. Through those agreements, the employee receives some type of separation benefit (typically a payment or severance) in exchange for waiving and releasing any potential claims against the company.
The goal is to avoid an existing or potential dispute, claim, or lawsuit. But if companies don’t routinely review and update those agreements, they risk the agreement being challenged or invalidated. Even worse, companies are sometimes investigated and forced to pay fines or penalties for provisions in the agreements. A recent settlement announced by the Securities and Exchange Commission (SEC) provides a strong reminder to employers to regularly review and update agreements used with employees.
Facts
On September 19, 2023, the SEC announced a settlement with a real estate services firm. According to the announcement, the company violated the SEC’s whistleblower protection rule with separation agreements it used between 2011 and 2022. The agreements contained a common provision: Employees had to affirm they hadn’t filed a complaint about the company with any state or federal court or local, state, or federal agency. These types of representations are typically included in separation or settlement agreements to ensure that any pending complaint or charge is resolved in conjunction with the separation or settlement agreement.
The SEC, however, concluded the agreements discouraged employees from filing complaints with federal agencies, including the SEC. Specifically, the announcement noted that by conditioning separation pay on employees’ signing the release with this language, the company impeded potential whistleblowers from reporting complaints to the SEC. In its order reflecting the settlement, the SEC referenced laws encouraging whistleblowers to report potential securities law violations, which provide (among other things) confidentiality protections.
The company at issue didn’t admit any fault and, according to the SEC announcement, cooperated with the agency. Still, the company paid $375,000 to resolve the investigation, and the settlement is public.
Other crack downs on separation agreements
It may be tempting to conclude the SEC’s settlement in this matter won’t affect your separation or settlement agreements. Taking that position, however, is risky, to say the least. Other agencies have similarly cracked down on agreements that may interfere with their jurisdiction, and state legislatures are limiting confidentiality provisions in agreements with employees.
For example, courts and the Equal Employment Opportunity Commission (EEOC)—which administers, investigates, and enforces federal antidiscrimination laws such as Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act (ADA), and the Age Discrimination in Employment Act (ADEA)—have held that any attempt to limit an employee’s ability to file a charge or participate in an investigation with the EEOC is void.
Like the SEC’s recent announcement, the EEOC announced a settlement in 2018 with a company that had tied receipt of severance pay to limited employees’ rights to file charges or communicate with the EEOC or accept relief obtained by the EEOC. As part of the settlement, the company hired an outside EEO consultant to review its agreements, and it agreed to revise past agreements and notify employees who signed them about their rights.
Earlier this year, the National Labor Relations Board (NLRB) issued its decision and order in McLaren Macomb, in which it concluded certain confidentiality and nondisparagement provisions in employee severance agreements violated the employees’ rights under the National Labor Relations Act (NLRA)—and the mere offer of such provisions in severance agreements is unlawful.
Finally, in 2023 Colorado enacted the Protecting Opportunities and Workers’ Rights (POWR) Act. Among other things, the law restricts employers’ ability to prohibit employees or prospective employees from disclosing or discussing unlawful employment practices. Several other states—such as California, Illinois, Maine, New York, Oregon, and Washington—have similarly enacted laws restricting the use of nondisclosure and nondisparagement clauses in agreements with employees.
Practical pointers
The SEC’s recent settlement is another reminder to look critically at your company’s separation and settlement agreements. Beyond those agreements, it’s important to review any agreement with employees or prospective employees that could potentially limit their right to disclose unlawful working conditions or participate in a complaint or investigation with a federal, state, or local agency.
With so many companies operating across multiple states, it’s important to ensure any agreement complies with the laws of each jurisdiction in which it might be used. An agreement that is compliant in Utah might not work in Colorado or California.
