Pre-taliation: This Is Not a Hard Concept

Much has been said about the Securities and Exchange Commission’s crackdown on so-called “pretaliation” clauses in employment contracts, and we’re going to say even more today since the SEC announced a new enforcement action this week.

But fundamentally, all the concern about pretaliation comes down to one question, that can be answered with one word.

Do your employment contracts impede people from reporting misconduct?

That’s it, really. If the answer is “yes” then you have a problem that needs to be fixed. And as we’ve seen again this week, if you don’t fix the problem, the SEC will fix it for you.

This time around the target company was BlueLinx Corp., a distributor of building products based in Atlanta with about 1,700 employees. The SEC fined BlueLinx $265,000 earlier this week for language in its employee severance contracts that violated the spirit of Section 21F of the Exchange Act. That rule that says nobody can impede someone from communicating with the SEC about possible violations of federal securities law.

What contract language landed BlueLinx in such hot water? According to the SEC complaint, the separation clauses said this:

“Employee has not and in the future will not use or disclose to any third party Confidential Information, unless compelled by law and after notice to BlueLinx.”

pretaliation“Compelled” is the crucial word here. An employee could not approach the SEC (or any other regulator) on his or her own initiative to raise alarms about possible misconduct. You could only speak after a court order allowed you to do so, which by definition means that someone else had to disclose the misconduct first.

That language alone is troubling enough. By 2013, however, BlueLinx tried to flimflam its way around Section 21F by amending its contract language to confirm that, yes, an employee could volunteer confidential information to regulators “if applicable law requires that employees be permitted to do so”—but any employee who takes that route waives the right to collect any whistleblower reward the employee might get for tipping off the feds.

Defining ‘Impediment’

Come on, BlueLinx. Do your employment contracts impede people from reporting misconduct? This is not a difficult question to answer.

Of course tying severance pay to silence clauses can impede someone’s ability to report misconduct. Of course asking someone to waive whistleblower rewards can impede that person’s ability to report misconduct. People need money to survive. If a company threatens to withhold money because an employee wants to tell regulators of possible misconduct, that’s an impediment. If a company offers extra money so an employee will not speak to regulators—that’s the same scenario, constructed in a different way. It’s still an impediment.

As to waiving your rights to whistleblower rewards, in May the SEC granted a $3.5 million reward to a whistleblower partly to serve as compensation for that person being blackballed by a whole industry. As the SEC put it, “the record demonstrates that the claimant has been unable to find employment since reporting the misconduct and that this is significantly due to Claimant’s whistleblowing activities.”

In other words, when BlueLinx tried to block the possibility of whistleblower rewards, employees had no protection against industry-wide retaliation imposed by other companies that might see him or her as a troublemaker. That is an impediment to reporting misconduct, too.

What’s worse is that when you read BlueLinx’ own code of conduct, its non-retaliation policy says this:

It is against the code for any employee to retaliate, directly or indirectly, or encourage others to do so, against any employee for reporting, lawfully and in good faith, a violation. Any employee who believes retaliation has occurred should immediately inform the general counsel or the vice president of human resources.

BlueLinx seems to see retaliation for speaking to regulators as an action that somebody does—which is one important way to see the problem. But let’s not forget that retaliation can also be a condition that a company fosters, through employment contracts or other devices that shape the corporate culture.

That’s what happened here. That’s what pretaliation is.

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