Having adequate whistleblower protections in employment agreements might not be enough if other documents have a contradictory message, employment law specialists say.
The Securities and Exchange Commission has been stepping up its efforts to ensure insiders feel safe coming forward with allegations of company wrongdoing, fining one company $10 million in September for using language in its separation agreements discouraging whistleblowers.
“Those drafting or using these types of agreements should take … serious their obligations to ensure that they don’t impede whistleblowers,” Gurbir Grewal, the SEC’s enforcement director, said when he announced the big fine against D.E. Shaw, a brokerage.
In addition to the fine against D.E. Shaw, that same month it fined Monolith, an energy company, $225,000 for using contract language that prohibited employees from receiving any monetary award from agencies for coming forward.
Both D.E. Shaw and Monolith are private companies, representing an expanded enforcement effort by the agency.
Under Rule 21f–17 of Dodd-Frank, the SEC has in its sights anything that would discourage employees from coming forward, so provisions in company employment, separation, severance, confidentiality or non-disparagement agreements could come under scrutiny.
If agreements don’t prohibit employees from speaking to an agency but require them to report any contact they’ve had with an agency before they can collect on their severance payments, that could be seen as a violation as well. And so, too, could any provision that doesn’t let employees collect a monetary award in exchange for coming forward.
The monetary awards are a big part of the whistleblower program for both the SEC and the Commodity Futures Trading Commission, which also enforces the program. Together, the two agencies have awarded some $2 billion since the program began, with one whistleblower this year receiving $279 million. Under the rules, whistleblowers can receive up to 30% of the money recovered from companies.
For in-house lawyers, it’s crucial to be consistent across agreements and even within agreements, because having compliant language in one place doesn’t mean you can't get hit for non-compliant language elsewhere, said Sheri Adler, an employment law attorney with Troutman Pepper. “Take a holistic approach,” she said in a webcast hosted by the firm.
If you have compliant language in your confidentiality provision, for example, you still need to make sure language in other provisions, like a non-disparagement clause, isn’t contradictory.
In one SEC case, a company restricted employees from making disparaging remarks to regulators as part of a broader list of entities, like the media, analysts, customers and investors. The SEC hit the company for that even though in other parts of the agreement the language was compliant.
“The SEC felt that, by telling employees they could not disparage, including to the SEC, that would discourage employees from coming forward and reporting on possible securities laws violations,” she said, “because that was likely to be viewed as disparaging, denigrating, maligning and impugning the company.”
One way to ensure consistency is to cross-reference compliant language throughout an agreement, said Adler.
“If you have a good whistleblower carve-out in one place, and a broad non-disparagement in another place, you might just cross-reference that section,” she said: ‘“Nothing in this section is intended to detract from any rights permitted under Sec. xyz,’ the whistleblower carve-out.”
Although the SEC has focused primarily on employment, separation and severance agreements, among other contractual documents, other material should be consistent, too. That means employee handbooks, training materials and codes of conduct and other policies, said Mary Weeks, an employment law litigator at Troutman Pepper.
If the company has subsidiaries, including in other countries, it’s important to ensure consistency across those entities, too, because having compliant language in the parent company isn’t enough.
In one SEC case, the parent company had a whistleblower carve-out, but the employee manual in one of its subsidiaries prohibited employees from talking to regulators without receiving prior approval from the company. Adding to the problem, the company had contract language that said any time the parent and subsidiary have contradictory language, the more restrictive provision prevails.
“The SEC said the provision was not cured by the parent company document,” Adler said.
Even if the company tries to go the extra mile and send out an email or other communication telling employees that it abides by whistleblower protections, that won’t be enough if actual contract language says something different.
In one SEC case, the company sent emails sharing compliant language and requiring employees to sign off that they knew about the protections, but the company’s agreement templates kept old, non-compliant language in them. “That [email] wasn’t enough,” said Adler.
For companies trying to go through their documents to make sure they have compliant language, it’s not always the case that the broadest language is best, said Weeks.
Replacing potentially non-compliant language with something broad, like a provision ensuring employees are free to reach out to any federal agency, could end up being too broad.
Although broad language would probably satisfy the SEC, there could be instances in which such broad language could run afoul of federal labor law. The Equal Employment Opportunity Commission, for example, has some monetary restrictions around contracting that overly broad whistleblower language wouldn’t necessarily be compatible with.
“You want to make sure you’re not satisfying one agency while not doing something that will get you in trouble with another agency,” Adler said.