Why it matters

The Securities and Exchange Commission (SEC) continued its efforts against anti-whistleblowing provisions in severance agreements, fining one employer $265,000 for the use of an allegedly illegal clause. Atlanta-based BlueLinx Holdings violated securities laws by using severance agreements that required outgoing employees to waive their rights to monetary recovery should they file a charge or complaint with the SEC or other federal agencies. The prohibitions were used after August 2011, when the agency adopted Rule 21F-17 forbidding any action impeding an individual from communicating with the SEC about possible securities law violations. But the employer forced employees to waive their whistleblower rights or risk losing other post-employment benefits, the agency said. “We’re continuing to stand up for whistleblowers and clear away impediments that may chill them from coming forward with information about potential securities law violations,” said Stephanie Avakian, deputy director of the SEC’s Enforcement Division, in a statement about the BlueLinx action. “Companies simply cannot undercut a key tenet of our whistleblower program by requiring employees to forgo potential whistleblower awards in order to receive their severance payments,” added Jane Norberg, acting chief of the SEC’s Office of the Whistleblower.

Detailed discussion

In 2011, the SEC promulgated Rule 21F-17, which provides in part that “(a) No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement…with respect to such communications.” The rule was intended to fulfill the purpose of the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act.

Both prior to August 2011, when Rule 21F-17 became effective, and after, BlueLinx entered into severance agreements with employees leaving the company and receiving some form of post-employment consideration. The Atlanta-based company has about 1,700 employees, and the “vast majority” of nonmanagement employees who left the company were asked to sign one of a variety of forms of severance agreements.

Although the forms differed somewhat, they contained some form of a provision prohibiting the employee from sharing—with anyone—confidential information concerning BlueLinx that the worker had learned while employed by the company, the SEC said, unless compelled to do so by law or legal process. These confidentiality provisions also required the employee to either obtain written consent from the legal department or provide written notice prior to providing confidential information in the event of legal process and provided no exception to permit the employee to voluntarily provide information to the SEC or other agencies. Approximately 18 BlueLinx employees signed an agreement containing these confidentiality provisions.

In 2013, the company amended its severance agreements, adding a new provision that stated: “Employee further acknowledges and agrees that nothing in this Agreement prevents Employee from filing a charge with…the Equal Employment Opportunity Commission, the National Labor Relations Board, the Occupational Safety and Health Administration, the Securities and Exchange Commission or any other administrative agency if applicable law requires that Employee be permitted to do so; however, Employee understands and agrees that Employee is waiving the right to any monetary recovery in connection with any such complaint or charge that Employee may file with an administrative agency.” About 160 employees signed agreements with this provision, the SEC said, which operated counter to the purpose of Rule 21F-17 and undermined the intent of Dodd-Frank.

“By including those clauses in its Severance Agreements, BlueLinx raised impediments to participation by its employees in the SEC’s whistleblower program,” according to the agency’s order. “By requiring departing employees to notify the company’s Legal Department prior to disclosing any financial or business information to any third parties without expressly exempting the Commission from the scope of this restriction, BlueLinx forced those employees to choose between identifying themselves to the company as whistleblowers or potentially losing their severance pay and benefits. Further, by requiring its departing employees to forgo any monetary recovery in connection with providing information to the Commission, BlueLinx removed the critically important financial incentives that are intended to encourage persons to communicate directly with the Commission staff about possible securities law violations.”

The agency ordered BlueLinx to pay a $265,000 fine and terminate use of the challenged provision. The company must also make reasonable efforts to contact the former employees who signed any of the severance agreements, provide them with an Internet link to the SEC order, and provide a statement that BlueLinx does not prohibit them from “providing information to, or communicating with, Commission staff without notice to the Company” or “accepting a whistleblower award from the Commission pursuant to Section 21F of the Exchange Act.”

Further, the company will add a new clause to its severance agreements: “Protected Rights. Employee understands that nothing contained in this Agreement limits Employee’s ability to file a charge or complaint with the Equal Employment Opportunity Commission, the National Labor Relations Board, the Occupational Safety and Health Administration, the Securities and Exchange Commission or any other federal, state or local governmental agency or commission (‘Government Agencies’). Employee further understands that this Agreement does not limit Employee’s ability to communicate with any Government Agencies or otherwise participate in any investigation or proceeding that may be conducted by any Government Agency, including providing documents or other information, without notice to the Company. This Agreement does not limit Employee’s right to receive an award for information provided to any Government Agencies.”

The action is the agency’s third against an employer based on allegations of Rule 21F-17 violations. In April 2015, the SEC filed and settled a case with a technology and engineering firm that instructed employees not to discuss the workings of an internal investigation without prior authorization by the law department, imposing a $130,000 fine.

Earlier this year, the agency included claims based on Rule 21F-17 in an action against a financial services institution that settled for $415 million, alleging the company failed to include a carve-out in the confidentiality provisions of its severance agreements allowing employees to voluntarily give confidential information to government agencies.

To read the order in In the Matter of BlueLinx Holdings Inc., click here.