SEC Settlement A Reminder for Employers: Review Your Separation Agreements

Holland & Hart - Employers' Lawyers

Holland & Hart - Employers' Lawyers

Companies routinely use separation agreements with departing employees.  Through those agreements, the employee receives some type of separation benefit (typically a payment or severance), and in exchange the employee waives and releases any potential claims against the company.  The goal is to avoid an existing or potential dispute, claim, or lawsuit.  But if companies do not 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 these agreements.  A recent settlement announced by the Securities and Exchange Commission (SEC) provides a strong reminder to employees to regularly review and update agreements used with employees.    

The 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 that they had not 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 that 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 complaint 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 did not admit any fault and, according to the SEC announcement, cooperated with the SEC’s investigation.  Still, the company paid $375,000 to resolve the SEC’s investigation.  And, the settlement is public.

Other Agencies and State Legislatures Similarly Crack Down on Separation Agreements

It may be tempting to conclude that the SEC’s settlement in this matter will not impact 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 anti-discrimination laws such as Title VII, the Americans with Disabilities Act, and the Age Discrimination in Employment Act, 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 in 2018 a settlement with a company that had conditioned receipt of severance pay that limited employees’ rights to file charges or communicate with the EEOC or accept relief obtained by the EEOC.  As part of that settlement with the EEOC, the company hired an outside EEO consultant to review its agreements, and it agreed to revise past agreements and notify employees who signed those agreements about their rights.

Earlier this year, the National Labor Relations Board (NLRB) issued its decision and order in McLaren Macomb, 372 NLRB No. 58 (February 21, 2023), in which it concluded that 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, that law restricted 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, similarly enacted laws restricting the use of nondisclosure and nondisparagement clauses in agreements with employees.

Practical Pointers

The SEC’s recent settlement is yet another reminder to look critically at any separation and settlement agreements your company.  Beyond those agreements, it is 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 is important to ensure the 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.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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