Tuesday, October 18, 2016

OSHA issues a new policy on gag clauses in settlement agreements

The Department of Labor’s Occupational Safety and Health Administration (OSHA) recently issued a memorandum announcing its new policy against gag clauses in settlement agreements. OSHA’s memorandum restates the long-running policy against restraints on protected activity, but goes farther in assuring that whistleblowers preserve their right to receive awards that are intended to encourage them to report violations.

In the early years of the Department of Labor whistleblower protection program, nuclear power companies would offer substantial monetary settlements to whistleblowers in exchange for their agreements not to make any disclosures – including disclosures of nuclear safety problems -- to the Nuclear Regulatory Commission (NRC). After the 1979 Three Mile Island and 1986 Chernobyl incidents, the Department of Labor and the courts became more sensitive to the danger of “hush money” settlements. One court would not allow the Secretary of Labor to merely excise the gag clause from a settlement agreement. Macktal v. Secretary of Labor, 923 F.2d 1150, 1155-1156 (5th Cir. 1991). My December 31, 2013, blog post reviews the prior law on gag clauses in settlements.

In 1989, the NRC adopted its first policy to require licensees to maintain a culture of compliance. That policy has now evolved into the Safety Culture Policy Statement. It requires nuclear plants to actively encourage employees to report safety concerns and assure that they are timely and effectively remediated.  As a result, the number of whistleblower cases arising from the nuclear industry has declined significantly.

In 2010, the Dodd-Frank Act upped the stakes in corporate fraud whistleblower cases by creating a statutory right to an award for whistleblowers whose disclosures result in substantial SEC or CFTC recoveries. Congress was rightly concerned that the 2002 Sarbanes-Oxley Act had failed to prevent the 2008 mortgage fraud scandals that plunged us into the Great Recession. After Dodd-Frank, whistleblowers have received over $100 million in awards from the SEC for providing information that lead to over $500 million in recoveries by the SEC.

Some companies still have not adopted the culture of compliance and continue to look for ways to discourage employees from reporting known violations. Companies are now barred from adopting overly broad confidentiality policies or agreements that make employees think they cannot make reports to the government. Last year, the SEC fined KBR $130,000 for imposing such a gag clause on its employees.

In response, some companies began requiring departing employees to waive their right to any whistleblower award as a condition of receiving their severance. That requirement made clear that, rather than boosting compliance by encouraging employees to report misconduct, it exemplified a culture of suppression by discouraging employees from coming forward with information. It is also now illegal.

In August, 2016, the SEC fined Health Net $340,000 for including in a settlement agreement a provision that the employee waived any SEC whistleblower award. “Financial incentives in the form of whistleblower awards, as Congress recognized, are integral to promoting whistleblowing to the Commission,” said Antonia Chion, Associate Director of the SEC Enforcement Division.  “Health Net used its severance agreements with departing employees to strip away those financial incentives, directly targeting the Commission’s whistleblower program.” 

Seeking to extend this doctrine to the settlements reviewed by the Department of Labor, the Government Accountability Project petitioned for a new rule against approving Health Net-style settlements.  OSHA agreed and issued the memorandum to its regional offices. OSHA will now disapprove any settlement that:
  • Restricts protected activities, including reports of dangers to the government
  • Requires notice to the employer before making disclosures to the government (such a requirement has the effect of giving the crooks warning that the cops are in pursuit)
  • Makes the whistleblower promise that no disclosure has been made to the government (which undercuts the right to make a confidential disclosure to the government)
  • Waives any monetary award for whistleblowing
The policy also provides that OSHA will closely scrutinize liquidated damages provisions that are disproportionate or unaffordable. Where settlement agreements contain confidentiality clauses that apply “except as provided by law,” OSHA will propose the following clarification:

"Nothing in this Agreement is intended to or shall prevent, impede or interfere with complainant's non-waivable right, without prior notice to Respondent, to provide information to the government, participate in investigations, file a complaint, testify in proceedings regarding Respondent's past or future conduct, or engage in any future activities protected under the whistleblower statutes administered by OSHA, or to receive and fully retain a monetary award from a government-administered whistleblower award program for providing information directly to a government agency."

With this provision, employees will better understand their legal right to speak up, provide information about dangerous conditions and violations of the law, and apply for and receive whistleblower awards.

One of GAP’s attorneys issued this statement on the new policy:

De facto gag clauses undermine the operation and frustrate the intent of the whistleblower protection laws that DOL enforces by chilling or discouraging employees from disclosing to regulatory and enforcement agencies information about threats to public health and safety, financial fraud, consumer safety, food safety, nuclear safety, transportation safety, and other vital public concerns.

Employers have the opportunity to be proactive in assuring that their policies protect employees who raise compliance concerns, and that their personnel practices actually reward those who speak up. Particularly for employers regulated by the SEC, now is a good time to learn a lesson from the nuclear industry.

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