Colder than a polar bear’s toenails: The chilling effect of waivers.
Waivers in employment and separation agreements.
Waiver clauses in employment or separation agreements can create a chilling effect by discouraging employees from reporting misconduct or engaging in whistleblower activities. These clauses often try to limit an employee’s ability to report wrongdoing to government authorities, or restrict their right to benefit from whistleblower rewards under statutes like the False Claims Act (FCA) or the Dodd-Frank Act.
Here’s what that waiver might look like:
Order Instituting Cease-And Desist Proceedings Pursuant To Section 21c Of The Securities Exchange Act Of 1934, Making Findings, And Imposing A Cease-And-Desist Order
https://www.sec.gov/files/litigation/admin/2024/34-100969.pdf
As you can see, the waiver doesn’t necessarily prevent the employee from reporting the conduct, but it removes the incentive. The SEC considers that to be just as bad.
Here are the key issues associated with these clauses:
Legal Prohibitions
Under U.S. law, certain waiver clauses are unenforceable. For example, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have made it clear that agreements limiting an employee's ability to report possible securities law violations are not enforceable. The SEC, under Rule 21F-17, explicitly prohibits such clauses in employment agreements, and has imposed fines on companies attempting to use them.
False Claims Act
The FCA, which allows whistleblowers (relators) to file qui tam actions on behalf of the government, also prohibits agreements that block an individual’s right to file claims. Courts have generally held that pre-filing release agreements that waive qui tam rights may be enforceable only in limited situations, like when the government is already aware of the fraud. Under the qui tam provision of the False Claims Act, a private party (also referred to as a whistleblower or relator) may file an action on behalf of the United States and receive a portion of the recovery, typically between 15-30%.
Chilling Effect
Even though these waiver clauses may be legally unenforceable, their presence can create a chilling effect by misleading employees into thinking they will face legal or financial consequences if they report. This could deter individuals from acting, especially if they are unaware of the protections afforded by whistleblower laws.
Retaliation Concerns
These clauses might also signal potential retaliation, making employees fear that reporting misconduct will result in legal disputes or damage their future employment prospects. This further discourages employees from reporting fraud, abuse, or safety violations.
Financial Disincentives
Some clauses try to limit or waive an employee’s right to receive financial rewards from whistleblower programs, such as those under the SEC’s whistleblower program or the FCA. This could discourage whistleblowing by removing the financial incentives intended to encourage reporting.
In summary, although most of these clauses are legally unenforceable, they can still have a profound chilling effect by creating uncertainty and fear, preventing potential whistleblowers from stepping forward. Companies that continue to use them risk legal consequences, including enforcement actions by agencies like the SEC, as well as broader reputational harm.
If you think you’ve observed fraud or misconduct, we can evaluate your options. Vivek Kothari is a former federal prosecutor who represents whistleblowers. For a free consultation, contact Vivek by email, phone, Signal, or fill out the contact form.