Employment Agreements, Confidentiality Clauses & Whistleblower Rights – a Balancing Act



Most severance agreements these days specify that nothing in the agreement prevents the employee from speaking with regulators about possible violations of the law. This is due to regulators’ concerns that the confidentiality clause that is standard in severance agreements may chill employee whistleblowing.

But what about other employment agreements that have confidentiality clauses?

Employees sign all sorts of agreements with confidentiality restrictions, ranging from offer letters to deferred compensation award agreements. Must these agreements also exempt whistleblowing from their confidentiality obligations?

For better or worse, it is likely only a matter of time until regulators apply the same scrutiny to every confidentiality provision an employee signs. While right now the issue is clearest for entities under the SEC’s jurisdiction (publicly-traded companies, broker/dealers and registered investment advisers), other agencies are likely to follow suit. In addition, the recently enacted federal trade secrets statute imposes similar requirements intended to protect whistleblowing.

Current State of Play – Severance Agreements Cannot Impede Whistleblowing

In a series of settlements and other releases, the SEC and FINRA have made clear confidentiality provisions in severance agreements may not prohibit former employees from communicating with regulators about suspected violations of the law.

  • In fall 2014, FINRA issued guidance barring FINRA member firms from using confidentiality provisions in settlement agreements that could be read to prohibit former employees from initiating communications with regulators regarding possible violations of the securities laws.
  • The SEC followed that up in summer 2016 with two settlements based on the use of confidentiality provisions in severance agreements that failed to make clear the former employee was free to communicate with regulators.[1]

In August 2016, the Occupational Health and Safety Administration (“OSHA”) got in the act and issued a memorandum specifying it would not approve any settlement agreement containing a confidentiality provision restricting an employee from engaging in protected whistleblowing.

The EEOC has also challenged the use of severance agreements that contain broad confidentiality and non-disparagement provisions, alleging that such provisions interfere with an employee’s right to participate in an EEOC investigation.

The Slippery Slope – the SEC’s Risk Alert

While previous regulatory activity has been limited to confidentiality provisions in settlement/severance agreements or in connection with internal investigations, the SEC issued a National Exam Program Risk Alert in 4Q 2016 expanding the same analysis to other employee agreements.

The Risk Alert, entitled “Examining Whistleblower Rule Compliance,” notes that in recent enforcement actions the SEC identified confidentiality provisions in severance agreements as having potential to impede former employees from reporting illegal activity to regulators. The Risk Alert gives notice SEC staff will be reviewing “compliance manuals, codes of ethics and employment agreements” for similar language that could discourage employees from communicating with regulators.

Defend Trade Secrets Act – Another Consideration

In a similar vein, the Defend Trade Secrets Act (the “DTSA”), enacted in May 2016, contains provisions designed to ensure that confidentiality restrictions intended to protect trade secrets do not impede whistleblowing by employees.

  • The DTSA specifies that employee whistleblowers may not be held liable for disclosure of trade secrets made in confidence to government officials in the course of reporting suspected violations of the law.
  • The DTSA also requires employers to provide notice of this whistleblower immunity in employment agreements relating to confidential and trade secret information entered into or updated after May 11, 2016. Employers who fail to provide such notice cannot collect attorneys’ fees or exemplary damages under the DTSA.

The Take-Away? Take Action Now

The writing is on the wall. Smart employers will review their employee handbooks, offer letters, employment agreements, codes of conduct – in addition to their severance agreements – with an eye towards whether the confidentiality provisions in those documents may impede employees and former employees from communicating with regulators about suspected violations of law.

While the Trump Administration’s SEC may not be as aggressive on these issues as President Obama’s SEC, it does not seem a smart risk to take. State regulators are likely to fill the void on these issues. As for the DTSA, it was enacted with broad bipartisan support.

Importantly, none of these regulatory actions or the DTSA ban the use of confidentiality provisions in employee agreements and severance agreements. Rather, they require that such agreements also contain language protecting whistleblower rights. It is simply a matter of getting the language right.

[1] The first such settlement was with Merrill Lynch. The second settlement was with publicly traded company BlueLinx Holdings Inc.

James Komie is an attorney with Howard & Howard in Chicago, IL. He regularly writes and speaks on new developments and trends in the law regarding non-competes and trade secrets, as well as issues relating to the financial services industry.

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