In early September, the Securities and Exchange Commission (“SEC” or “Commission”) settled a charge it brought against Monolith Resources, LLC, a Nebraska-based energy and technology company. The SEC claimed in the charge that, from February 2020 until March 2023, Monolith used separation agreements that improperly required departing employees to waive their rights to monetary whistleblower awards in connection with filing claims with or participating in investigations by government agencies such as the SEC.
While the releases and confidentiality provisions did not restrict employees’ right to bring claims or participate in SEC investigations, the employees were required to waive their rights to obtain monetary compensation for bringing any such whistleblower claim. The SEC alleged that this waiver provision violated SEC Rule 21F-17 (17 C.F.R. § 240.21F-17). This rule prohibits any person from taking “any action to impede an individual from communicating directly with the Commission staff about possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement…with respect to such communications.”
The SEC found that Monolith’s separation agreements raised impediments to participation in the SEC’s whistleblower program by forcing employees to waive financial benefits that were intended to encourage people to communicate with the SEC about possible securities law violations. The SEC stated that such communications with its staff are integral to its investigative powers and should not be stifled. Monolith was ordered to pay $225,000, but it was specifically noted that it would have been ordered to pay more had it not changed the language of its separation agreement during the course of the investigation.
The charge against Monolith was settled before any court could decide whether the SEC’s interpretation of Rule 21F-17 was legally valid. But this case should serve as a warning shot across the bow for any employers that use provisions similar to the one at issue in Monolith in their separation agreements.
This case is also notable as it is the third government agency this year to take a bold, pro-worker position in regard to employment agreements. This trend started in January when the Federal Trade Commission (FTC) not only found that multiple employers’ non-competition agreements violated the FTC’s rules regarding unfair conduct affecting competition, but also proposed a rule that would ban non-competes nationwide. In February, the National Labor Relations Board (NLRB) issued a ruling in McLaren Macomb that held confidentiality and non-disparagement provisions in separation agreements were an unfair labor practice. Just a few months later, the NLRB joined the fight against non-competes when its General Counsel released a guidance memo taking the position that non-competes and similar restrictive covenants contained in employment agreements violate a worker’s right to organize/engage in concerted activities under Section 7 of the National Labor Relations Act. Now, the SEC has deemed releases of rights to receive whistleblower awards in employment separation agreements violate its rules.
Many employers will continue to review and update, as necessary, their separation and release agreements to ensure that the provisions comport with the recent policy updates and rulings from these government agencies.
