Tag Archives: separation agreement

February 7, 2017

SEC Targets Severance Agreements That Impede Whistleblowers

By Mark Wiletsky and Brian Hoffman

The U.S. Securities and Exchange Commission (SEC) is cracking down on severance agreements that prohibit former employees from contacting regulators or accepting whistleblower awards under threat of losing their severance payments or other post-employment benefits. More and more, the SEC’s Enforcement Division has announced new cases filed against, and settlements made with, companies which restrict former employers from blowing the whistle through severance agreement clauses. Many of the scrutinized companies are not in the securities industry, and the problematic contract language is not as obvious as you may think.

Dodd-Frank Act Established Whistleblower Programs

The 2010 Dodd-Frank Act established whistleblower programs for the SEC as well as the Commodity Futures Trading Commission. Under the SEC’s whistleblower program, eligible whistleblowers who provide unique and useful information about securities-law violations to the SEC can collect significant awards of 10-to-30 percent of a penalty that exceeds $1 million.

Essential to the program, however, are the anti-retaliation provisions, which prevent whistleblowers from suffering adverse actions as a result of their whistleblowing activities. In addition, an SEC rule, Rule 21F-17, prohibits any action that impedes an individual from communicating with the SEC about possible securities violations. Rule 21F(h)(1) of the Dodd-Frank Act prohibits employers from taking retaliatory actions against whistleblowers who make protected reports.

Award Waivers, Confidentiality, and Non-Disparagement Clauses

Severance agreements often contain boilerplate language, occasionally including clauses that restrict a former employee from disclosing any confidential company information and disparaging the company or its officers and managers. Agreements also sometimes require that a former employee agree to waive any awards or monetary recovery should he or she file a complaint with a governmental agency. These severance provisions are exactly the type of restrictive language that the SEC has been targeting.

In its first whistleblower protection case involving restrictive language, in 2015 the SEC charged a global technology and engineering firm with a violation of Rule 21F-17. The company had required witnesses involved in internal investigations to sign confidentiality agreements that stated that the employee could face discipline or termination if they discussed the matter with outside parties without the prior approval of the company’s legal department. Because the investigations could involve possible securities-law violations and the clause prohibited employees from reporting possible violations directly to the SEC, the SEC found that the restrictive language in the confidentiality agreements impeded whistleblowers. The company agreed to pay a $130,000 penalty to settle the charges and voluntarily amend its confidentiality statements to add language to inform employees that they may report possible violations to the SEC and other federal agencies without company approval or fear of retaliation.

Recent SEC Cases Targeting Severance Agreements 

Additional whistleblower severance agreement cases highlight other clauses targeted by the SEC. In mid-2016, the SEC charged a building products company with using severance agreements that required former employees to waive their rights to a monetary recovery if they filed a complaint with the SEC or another government agency. The clause stated that the departing employee was required to waive possible whistleblower awards or risk losing their severance payments and other post-employment benefits. The company did not admit liability, but agreed to settle with the SEC for a $265,000 penalty.

Also in mid-2016, the SEC charged a financial services company for using language in agreements that restricted employees’ ability to disclose information to government agencies. Problematic wording included restricting any disclosure of confidential information, except when disclosure is required by law, in response to a subpoena, or with the company’s permission. (See also our prior client alert on the above three cases.)


October 21, 2014

EEOC’s Failure to Engage in Conciliation Dooms Its Separation Agreement Lawsuit Against CVS Pharmacy

Wiletsky_MBy Mark Wiletsky 

Chalk up a loss for the Equal Employment Opportunity Commission (EEOC) in its lawsuit against CVS Pharmacy’s separation agreements.  As we reported earlier, the EEOC sued CVS alleging that CVS’s separation agreements deterred employees from filing charges and communicating with the EEOC about discrimination and retaliation.  Dismissing the case, a federal judge recently ruled that the EEOC failed to engage in the required procedural steps, including conciliation, before filing its lawsuit. 

EEOC Dismissed Employee’s Charge, Then Went After Employer 

This lawsuit is an example of the aggressive, proactive nature of the EEOC in extending the protections of Title VII to new and novel claims.  The case arose after CVS terminated Tonia Ramos, a pharmacy manager.  Ms. Ramos signed CVS’s standard separation agreement, which included a release of claims and a covenant not to sue.  She then proceeded to file a charge with the EEOC claiming that her discharge was based on sex and race in violation of Title VII.  Almost two years later, the EEOC dismissed Ms. Ramos’s charge.  

The EEOC then contacted CVS asserting that based on the separation agreement, CVS was engaging in a pattern or practice of resistance to their employees’ full enjoyment of rights under Title VII.  In other words, the EEOC concluded that even though the individual employee did not have a valid discrimination claim against CVS, it would bring a pattern or practice case against CVS based on the language in its standard separation agreement used with potentially hundreds of former employees. 

No Conciliation, No Lawsuit 

Under Title VII enforcement procedures, the EEOC has the authority to investigate and act on a charge of a pattern or practice of discrimination, whether filed on behalf of an allegedly harmed employee or by the EEOC itself.  The procedures require that the EEOC try to resolve any alleged unlawful employment practices through informal means before filing a lawsuit.  Such means include conferences, conciliation and persuasion.  Although the EEOC and CVS discussed potential settlement by telephone twice before the EEOC filed suit, the EEOC failed to engage in conciliation, which proved fatal to its case.  Because an attempt at reaching a conciliation agreement is a prerequisite to the EEOC filing suit and it was undisputed that the EEOC did not engage in any conciliation process, the federal court dismissed the EEOC’s case against CVS. 

Judge’s Guidance is in the Footnotes 

The case was dismissed on procedural grounds, but the judge took the opportunity to offer his view on the merits of the EEOC’s arguments in several footnotes in the opinion.  First, the EEOC argued that the term “resistance” as used in Title VII should be interpreted broadly to extend to the language in CVS’s separation agreement even if that language did not amount to discrimination or retaliation under the Act.  The judge rejected that argument, stating that the term “resistance” requires some retaliatory or discriminatory act. 

Second, the judge discussed the “covenant not to sue” provision in CVS’s separation agreement.  Even though the provision stated that an employee could not “initiate or file . . . a complaint or proceeding asserting any of the Released Claims,” the release of claims (in another paragraph of the separation agreement) stated that it did not limit “any rights that the Employee cannot lawfully waive.” In addition, the agreement contained two carve out provisions specifying an employee’s “right to participate in a proceeding with any appropriate federal, state or local government agency enforcing discrimination laws” and that the agreement did not prohibit the employee from cooperating with any such agency in its investigation.  The judge wrote that these provisions would allow an employee to file an EEOC charge.  He went on to write that even if the separation agreement explicitly banned filing charges, those provisions would be unenforceable and could not constitute “resistance” under Title VII. 

One Case Down; One Still Pending 

The dismissal of the CVS lawsuit is good news for employers who use separation agreements, especially in light of the judge’s comments signaling that the EEOC’s arguments were without merit.  However, a similar case filed by the EEOC against College America is still proceeding through the federal court in the District of Colorado.  (We wrote about the College America case here.) Like CVS, College America has asked the court to dismiss the EEOC’s case.  We will let you know when the court rules on that motion.  In the meantime, employers should review their separation agreements to ensure they include a provision that the agreement does not prohibit employees from filing a charge, participating in an investigation or otherwise cooperating with an appropriate federal, state or local government agency that enforces discrimination laws.

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May 6, 2014

Separation Agreements Targeted By EEOC Again

Wiletsky_Mark_20090507_NM_crop_straightBy Mark Wiletsky 

The Equal Employment Opportunity Commission (EEOC) recently filed a lawsuit seeking to stop a Colorado employer from using its form separation and release agreement and to allow employees who have signed the form agreement to file charges of discrimination and participate in  EEOC and state agency fair employment investigations.  In its federal court complaint, the EEOC alleges that CollegeAmerica Denver violated the Age Discrimination in Employment Act (ADEA) by conditioning employees’ receipt of severance benefits on signing a separation and release agreement which, according to the EEOC, chills and interferes with the employees’ rights to file charges and/or cooperate with the EEOC and state fair employment practice agencies.  

As we wrote on this blog earlier, the EEOC has been scrutinizing employers’ separation agreements.  This is the second such lawsuit challenging language in the separation agreements that does not permit the filing of discrimination or retaliation charges with the EEOC or other government agencies.  As in the EEOC’s earlier complaint against a national pharmacy, the recent complaint against CollegeAmerica Denver targets numerous provisions in the separation agreement, including the release of claims, a non-disparagement clause and provisions in which the employee represents that he/she has not filed any claims, has disclosed to the company all matters of non-compliance and will continue to cooperate with and assist the company with any investigation or litigation.  

Many of the targeted provisions are standard clauses in form separation agreements.  Although it remains to be seen whether the courts will agree with the EEOC’s claims, it is always a good idea for organizations to review their agreements and ensure they do not raise any red flags for the EEOC while still protecting the company from future payouts for employment-related claims.  We will continue to provide updates as new developments arise.

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