Employers paying severance to separated employees usually require written release agreements that include a confidentiality provision. The employee is prohibited from disclosing the existence of the agreement, or from discussing the reasons for their departure from employment with persons outside of the company. Last week, the Securities and Exchange Commission announced that a government contractor’s employee confidentiality agreement violated the Dodd-Frank Act because it could deter employees from filing complaints with the agency about their former employer.

Dodd-Frank protects whistleblowers who raise complaints with regard to issues of financial importance to publicly held companies. An employee of a publicly traded federal contractor filed a complaint with the SEC, alleging that the confidentiality agreement had a chilling effect on employees’ willingness to report suspected abuses to the SEC. After an agency investigation, the contractor agreed to pay $130,000 and to amend its confidentiality agreements.

This settlement marks the first time that the SEC has concluded that employee confidentiality language violates federal securities laws. The particular language in this situation did not prohibit employees from complaining to government agencies (such a prohibition would be unenforceable), but instead required the employee to notify the employer in advance of any such complaint. The SEC determined that this advance notice requirement potentially deterred employees from complaining due to fear of retaliation.

While not universally used, this advance notice language is fairly common. The employer stated that the agreements had been in place for years, and were intended to protect the integrity of its internal investigative process. Both the SEC and employer agreed that the agreements had never been used to try to prevent an employee from reporting financial misconduct.

This development does not mean that publicly traded companies must entirely end use of confidentiality agreements with employees and former employees. However, the agreements should be written to limit their coverage to legitimate business subjects, and should make clear that they are not intended and will not be used to prevent the employee from complaining to a government agency. Advance notification requirements should be deleted.

The SEC’s position mirrors those of other federal government agencies reviewing employment agreements and policies. These agencies, including the EEOC and NLRB, do not base their interpretations of the legality of such documents on the employer’s intent or actual attempts to deter complaints to government agencies. Instead, the fact that the agreements/policies could be interpreted to have such deterrent effect is enough to cause the agency to challenge its use.