On August 15, 2016, the U.S. Securities and Exchange Commission (SEC) issued its second fine in six days to a health insurer for allegedly creating severance agreements that illegally restrict former employees from collecting awards as whistleblowers. The fines—totaling $605,000 between the two companies—signify a strong shift toward enforcement against employment agreements that impede the SEC's whistleblower program at a time when the Commission's enforcement actions generally have slowed from last year.

The most recent fine was issued against health insurer Health Net Inc., who agreed to pay $340,000 to end allegations that it required departing employees to waive their right to receive compensation for providing tips to the Commission. On August 10th, Atlanta building products distributor BlueLinx Holding, Inc. agreed to pay a $265,000 fine to cut off similar claims. Although their companies operate in different industries, the actions against them show striking similarities.

More specifically, both Health Net and BlueLinx utilized severance agreements that required employees to waive certain claims against the company in exchange for severance payments. Both companies amended their pre-existing severance agreements after the SEC's whistleblower incentive program was established. The new agreements included waiver language that allowed ex-employees to cooperate with government investigations, but specifically prohibited them from applying for or accepting any compensation under the whistleblower program. BlueLinx also required ex-employees to notify the company's legal department prior to going to any government agency. While Health Net later removed the specific reference to the whistleblower program, it left in broader language waiving the employee's right to receive payments for participating in subsequent government investigations.

The SEC said that such restrictions run afoul of federal law. SEC rules dictate that whistleblowers may collect between 10 and 30 percent of the total recovery when information they provide leads to an action recouping $1 million or more. The program, which was passed as part of the Dodd-Frank Act in August of 2011 under Rule 21F-17, was meant to encourage individuals to bring compliance matters to the attention of regulators. According to the SEC, such agreements "directly target[] the SEC's whistleblower program by removing the critically important financial incentives that are intended to encourage persons to communicate directly with the Commission staff."

These recent fines may also somewhat reflect a broader strategy by the SEC to increase whistleblower complaints in response to the Commission's dipping enforcement numbers in 2016. SEC enforcement actions reached an all-time high of 807 in FY2015, due in large part to the whistleblower program, which has provided over $85 million to 35 tipsters since its implementation. However, the SEC's enforcement activity in 2016 has lagged significantly from this record number, dropping 8 percent since last year.

Given the SEC's increased scrutiny on employment agreements and severance packages, particularly in the healthcare context, companies should take care to review their existing agreements and ensure they do not restrict whistleblower activity.