The Securities and Exchange Commission (SEC) has become the latest federal agency to challenge the legality of employee confidentiality requirements. Earlier this month, the SEC instituted its first administrative proceeding against an employee confidentiality provision. The targeted employer, KBR, Inc., a Houston-based global technology and engineering firm, settled with the SEC and consented to a cease and desist order that incorporated its proffered settlement terms. According to the SEC, the confidentiality provision at issue unlawfully stifled potential whistleblowers from communicating with the SEC in violation of SEC Rule 21F-17. With this latest action, the SEC joins the National Labor Relations Board (NLRB) and the Equal Employment Opportunity Commission (EEOC) as yet another federal agency that is seeking to limit the circumstances under which an employer can require employees to keep information confidential. In each instance, the federal agencies assert that overly broad confidentiality provisions can improperly “chill” employees from participating in federal agency investigations, proceedings, or other activities protected by federal law.  

KBR required employees who were interviewed in connection with internal investigations into unethical and illegal conduct to sign an agreement containing a confidentiality provision. The provision prohibited those employees from discussing the interview or its subject matter without prior authorization from KBR’s legal department. They were also informed that unauthorized disclosure could be grounds for discipline up to and including termination.  

Even though the SEC did not allege that KBR had prevented communication between employees or ever enforced the confidentiality agreements, the SEC still concluded that the confidentiality provision’s language undermined Rule 21F-17. Rule 21F-17 is one of the regulations that implement the Dodd-Frank Act’s securities whistleblower provisions codified in Section 21F of the Securities Exchange Act of 1934. Rule 21F-17 prohibits employers from taking “any action to impede an individual from communicating directly with the [SEC] about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement…with respect to such communications.” 17 C.F.R. 240.21F-17(a). The SEC found that the language of the provision violated this Rule by prohibiting employees from discussing the investigation under the threat of discipline. As part of the cease and desist order, KBR agreed to take remedial steps to amend its confidentiality provision and provide employees who signed an agreement containing the provision as of August 21, 2011, a copy of the SEC order and notice of the amendment. In addition, KBR also agreed to pay a $130,000 penalty to the SEC.  

The SEC’s order comes on the heels of recent NLRB and EEOC challenges to policies and agreements that contain a confidentiality provision that allegedly prohibit employees from engaging in protected activity such as communicating with the federal agencies or, in cases involving the NLRB, the right of employees to engage in protected activities with other employees. 

With policies and agreements facing increasing scrutiny by multiple federal agencies, employers should review common documents; policies and procedures such as confidentiality agreements, separation agreements, employment agreements and restrictive covenant provisions in policies; and handbooks to ensure compliance with federal employment and whistleblowing laws.