Have You Looked at Your Severance Agreement? Don’t Wait for the SEC to Do it for You!

SEC HQs 2A Virginia-based technology company, NeuStar Inc., became the latest company to settle with the Securities and Exchange Commission over allegations that its severance agreements violated a federal whistle-blower protection rule.

According to the SEC, NeuStar routinely entered “into severance agreements that contained a broad non-disparagement clause forbidding former employees from engaging with the SEC and other regulators 'in any communication that disparages, denigrates, maligns or impugns' the company.” The agreements, used with at least 246 departing employees, forced the ex-employees to forfeit all but $100 of their severance should they violate the agreement.

The $180,000 settlement comes amid a sharp focus by the SEC this year on severance agreements. Securities Exchange Act Rule 21F-17, enacted in August 2011, specifically prohibits confidentiality agreements designed to prevent an individual from communicating with the commission about potential securities violations.

In August, insurance company Health Net Inc. agreed  to pay $340,000 over its severance agreement. According to the SEC, the pact made departing employees forgo the ability to collect a whistle-blower reward as a condition for receiving severance payments and other post-employment benefits. That same month, BlueLinx Holdings Inc. agreed to pay $265,000 to settle similar allegations.

In September, in connection with a bribery probe, Anheuser-Busch InBev NV agreed to pay $6 million to settle both Foreign Corrupt Practices Act and Rule 21F-17 violations. In that case, an employee who had reported a potential bribe of government officials in India entered into a separation agreement in which the employee was prohibited from revealing any “unique, confidential and/or proprietary information.” Violation of the terms of the agreement would have resulted in a liquidated damages penalty totaling $250,000. The employee, who had previously been in contact with the SEC, ceased all communications with the agency after signing the agreement.

Subsequently, AB InBev modified its separation agreements to make clear that the company would not punish employees for reporting violations to federal agencies:

I understand and acknowledge that notwithstanding any other provision in this Agreement, I am not prohibited or in any way restricted from reporting possible violations of law to a governmental agency or entity, and I am not required to inform the Company if I make such reports.

The lesson here, of course, is that companies must be proactive in examining their severance agreements and making any necessary changes. With four Rule 21F-17 settlements since August, you’ve been warned—don’t wait for the SEC to take a look at these agreements for you!