Hidden Risks in Confidentiality Requirements

Recently the SEC fined Houston-based KBR, Inc. $130,000 for requiring some of its employees to sign confidentiality agreements that potentially prevented them from blowing the whistle on illegal activity, in violation of Rule 21F-17 of Dodd-Frank. Although this is the first enforcement action by the SEC under this rule, it’s not likely the last. Though the Commission was unaware of any instance in which a KBR employee was in fact prevented from communicating with the SEC about potential securities law violations, it found the agreement too restrictive because it “potentially discouraged” such reporting by requiring employees to first check with the legal department or risk possible termination.

The SEC’s action is one example of the increasing scrutiny government agencies have been giving to employer confidentiality agreements. Another involves the EEOC. It recently appeared to be challenging its own prior position that allowed a general release of claims in separation agreements provided that there are carve-out provisions telling the employee of his or her right to file a charge with the EEOC, or to participate in an investigation.

Confidentiality provisions should be reviewed in employee handbooks/codes of conduct, in practices for internal investigations and in severance agreements. Look for policies that prohibit disclosure of undefined employee confidential information. Also, establish an alert-hotline for anonymous complaints or concerns. This serves to highlight the company’s commitment to learning about and investigating potentially unlawful activity.