When Your Severance Agreement Stifles Whistleblowing

If you voluntarily resign from a position or face termination, it is likely a time for caution. Many employers offer severance packages that come with strict conditions. Some of these may even be illegal.

Your employer cannot force you to waive rights granted by federal law in a severance agreement, and that includes financial incentives for whistleblowing. Employees should not be forced to choose between a generous severance package and acting within the law, especially when violations threaten public interest. Here is what you should know about severance agreements that limit whistleblowing.

Recent Cases

The discussion around this issue arises from Securities and Exchange Commission (SEC) regulations. On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Exchange Act by including a provision to encourage the reporting of securities violations. It also added financial incentives for whistleblowing, since that is often the only way securities violations come to the surface.

Severance agreements because the tool for subverting this new law and its whistleblowing incentives. Two cases, in particular, stand out. One involved Health Net, Inc., a California-based company.

After the passage of the act, Health Net maintained severance agreements where former employees waived their rights to collect whistleblowing incentives. These agreements were drafted before the act’s passage but never changed. Even though Health Net updated its agreements later, it still paid a $340,000 penalty in August 2016 after the SEC discovered the violation.

BlueLinx Holdings, Inc. committed the same offense. Its severance agreements contained a similar provision and much like Health Net and the company never changed them to reflect the new law. One hundred and sixty employees signed these agreements even though they were technically illegal. The SEC was successful in bringing a cease and desist order against BlueLinx and collected a $265,000 penalty.

It is likely that this violation is more common than these two cases. Companies will work in their best interests and sometimes, that means holding former employees hostage. However, it is not in the best interest of employees or the public to discourage whistleblowing, especially if the illegal activity could also implicate that employee.

Proceed with Caution

The lesson to take from these incidents is that severance agreements must be handled with caution. Be familiar with general red flags, but also review carefully for questionable material. Even if you really need a complete severance package, never sign an agreement that leaves you feeling uncomfortable.

If your employer is not controlled by the SEC, you should still look carefully for other provisions that may penalize reporting unsafe work conditions or illegal employment practices. Limiting remedies when exercising these rights is just as illegal as anything linked with securities violations.

Hiring a New York employment law attorney to review your severance agreement is the best course of action. You will be able to make an informed decision on a severance agreement rather than a pressured one. Companies cannot restrict your legal rights to prevent this review and holding back benefits in retaliation for seeking help can be actionable. This makes legal representation in severance situations even more vital.

If a severance agreement appears to have questionable provisions, the Law Office of Christopher Q. Davis is available to place your mind at ease. Contact our office today to schedule a free case evaluation.