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Employee contracts and the SEC

When drafting confidentiality agreements and other documents for an employee contract, employers must be careful to ensure that the language is legally sound and does not violate federal or state law. The Securities and Exchange Commission warns that this must include avoiding any clauses or phrases that would cause employees to decide not to report potential violations to the SEC out of concern over possible retaliatory actions.

The confidentiality agreement may not be the only section of an employee contract that may have such a prohibitive effect. Employers are encouraged to review all employee agreements, including those in severance clauses, employment offers and others, and eliminate any words or phrases that could be taken as a warning that actions may be taken against whistleblowers.

A severance agreement typically does warn employees about the company’s right to protect certain private information. So, Reuters encourages employers to explain in writing to employees that nothing in the agreement should prevent or discourage them from exercising their legal rights and responsibilities. This includes protected actions such as filing a complaint or a charge with commissions or agencies of the federal government. 

Some employers may be concerned about the SEC’s offer of a reward for whistleblowers who report violators of securities law. Even so, it would be illegal for employees’ severance pay to be denied because they signed a contract waiving their claim to any funds if they were to receive a bounty award. Employers may be best served by ensuring that all clauses or provisions in a confidentiality or severance agreement refer only to the company’s intellectual property to prevent any appearance of wrongdoing.

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