Another Pre-Taliation Sweep!

The Securities and Exchange Commission’s campaign against companies using pre-taliation language in their employment contracts continues, with seven businesses sanctioned this week for making employees sign away their eligibility for whistleblower rewards. In total the companies will pay more than $3 million in penalties.

The SEC announced its enforcement action Monday morning. The worst offender, Acadia Healthcare Corp., agreed to a $1.38 million civil penalty. The other offenders are as follows:

• AppFolio, paying $692,250;
• a.k.a. Brands Holding Corp., paying $399,750;
• TransUnion, paying $312,000;
• LSB Industries, paying $156,000;
• IDEX Corp. paying $75,000; and
• Smart for Life, paying $19,500.

As described in the SEC settlement orders for all seven, the companies had used employment agreements with their workers that did allow the workers to report concerns of wrongdoing to regulators; but did not allow the employees to accept any whistleblower rewards that might arise from their tips. 

A good example comes from the settlement order with Acadia Healthcare. From 2019 into 2023, the company entered into 98 employment agreements that included the following (yes, the underline was in the original):

I further acknowledge that I am not waiving and am not being required to waive any right that cannot be waived under law, including the right to file an administrative charge or participate in an administrative investigation or proceeding; provided, however, that I disclaim and waive any right to share or participate in any monetary award resulting from the prosecution of such charge or investigation or proceeding.

The other six companies all had similar provisions, stressing that employees could always bring concerns about wrongdoing to regulators; the employees just couldn’t accept any financial reward from those regulators for doing so.

The SEC’s reply to that maneuver: no dice.

“These companies required employees to waive their right to possible whistleblower monetary awards,” Jason Burt, director of the SEC’s Denver Regional Office, said in a statement. “This severely impedes would-be whistleblowers from reporting potential securities law violations to the SEC.”

Burt has a point. Employees risk their professional careers and financial security by reporting potential misconduct. If a company forces them to sign away their chance at a whistleblower award that might make all their sacrifice worth the effort, that can chill their desire to speak up at all.

Clean Up in Employment Contracts

The good news is that there’s no evidence any of the seven companies actually tried to enforce those pre-taliation clauses against anyone. Lucky for them, since in the few instances where the SEC has sniffed out possible use of those clauses, it has responded with much larger penalties.

Moreover, all of the companies quickly moved to amend their employment contracts and remove the problematic language as soon as the SEC started asking about it. Some, such as Acadia Healthcare, had even begun fixing their pre-taliatory clauses before the SEC knocked on their door. (Perhaps they were loyal readers of Radical Compliance and had seen our many previous posts on pre-taliation enforcement.) 

Anyway, as I have said before and probably will end up saying again, remediating pre-taliation language is one of the more straightforward corrective actions a corporate compliance or HR team can undertake. 

First, fix your code of conduct and employee policy manual to clarify that employees always have an unfettered right to bring concerns of legal or compliance violations to regulators. 

Second, amend any templates you have for employment agreements (new hires, severance agreements, retention agreements, and so forth) to clarify those same points. For large companies with decentralized operations, you might even want to audit your template agreements, especially if you have independent subsidiaries or overseas business units. You will also want to track down former employees who previously signed agreements with pre-taliatory language included and tell them those restrictions are now lifted.

Third, amend any other template agreements you have with other third parties, such as customers or business partners. This is a relatively new step, since the SEC recently began taking enforcement action against companies that included pre-taliation language in settlement agreements with customers. (JPMorgan Securities, fined $18 million earlier this year.) 

So remediating pre-taliation language is getting more complicated, as the SEC keeps expanding the realm of where such language might be problematic. Large companies in particular will have a lot of potentially tedious work to do. (CBRE, which paid $375,000 in 2023 to settle pre-taliation issues with the SEC, is a good example of how large companies might want to remediate.)

On the other hand, these too-cute-by-half moves, such as allowing employees to blow the whistle but not allowing them to participate in award programs, do companies no favors with the SEC. It violates the spirit of a strong speak-up culture, and nobody should be surprised that draws the SEC’s ire.