May 11, 2017
Two recent developments in employment law have caught the eyes of shareholders and plaintiffs’ attorneys, and resulted in shareholder proposals and lawsuit threats against publicly traded companies. First, the Securities and Exchange Commission has sanctioned public companies for using confidentiality or separation agreements that contain language that, in the SEC’s view, might discourage whistleblowing to the SEC, even when those companies never attempted to enforce the agreements against whistleblowers. Second, increased public interest in equal pay issues has spurred amendments to state and local equal pay laws, which impose stricter standards on employers. Shareholders have demanded reports from companies regarding their pay equity and promotion statistics.
This client alert provides an overview of how these two issues may affect employers and outlines steps they can take to mitigate litigation and enforcement risk.
In 2011, the SEC adopted Rule 21F-17, which prohibits any person from taking any action to impede a whistleblower from communicating with the Commission about potential securities law violations. The SEC began targeting confidentiality provisions in employment-related agreements and policies under the Rule in 2015, and these enforcement actions increased in 2016.
Some of the targeted agreements were standard form employee agreements that prohibited the disclosure of confidential information and trade secrets. In that context, the SEC objected to the absence of express carve-outs for whistleblowing. Other agreements required employees to waive the right to receive whistleblower awards for providing information to the SEC.
Shareholder plaintiffs have also threatened lawsuits based on alleged Rule 21F-17 violations. For example, some plaintiffs’ firms have sent demand letters notifying companies of potential violations of Rule 21F-17 and alleging breaches of fiduciary duties. Public companies should assume that the SEC and plaintiffs’ firms are monitoring Form 8-K filings disclosing the departure of named executive officers and are examining publicly-filed severance and other employee agreements to look for confidentiality provisions without whistleblowing carve-outs. Employers whose employment-related agreements allegedly fail to comply with the SEC’s interpretation of Rule 21F-17 may therefore find themselves responding to both SEC inquiries and shareholder demands.
Congress also has taken steps recently to protect employees who disclose confidential information in connection with reporting suspected violations of law. The Defend Trade Secrets Act of 2016 ("DTSA"), which creates a federal cause of action for trade secret misappropriation, permits employees to disclose trade secret information without incurring any criminal or civil liability where the information is either disclosed to the government or an attorney for the purpose of investigating or reporting a suspected violation of law, or disclosed in a court filing made under seal. The DTSA also permits employees to use trade secret information in anti-retaliation lawsuits under certain conditions. In order to retain their right to recover certain damages under the DTSA, employers are required to provide notice of this immunity "in any contract or agreement with an employee that governs the use of a trade secret or other confidential information." Employers may satisfy this notice requirement by providing a "cross-reference to a policy document provided to the employee that sets forth the employer’s reporting policy for a suspected violation of law."
In light of these developments, employers would be well-advised to review and update their employment, confidentiality and severance agreements and related policies to reduce the risk of SEC and shareholder action and to comply with the disclosure provisions of the DTSA. Given the interrelated nature of the SEC and DTSA requirements, it may be possible to address both issues efficiently with the same disclosure language in appropriate agreements and policies.
Public and media interest in gender, racial and ethnic pay equity issues, as well as advancement within companies, appears to be at an all-time high. Litigation under Title VII and the Equal Pay Act remains active, and, unless the new Administration changes course, the EEOC will soon begin a mandatory collection of extensive pay data by race, ethnicity and gender for most employers in the United States. In addition, numerous states and localities have recently adopted or strengthened their own equal pay laws. California, for example, has adopted more aggressive pay equity legislation, and both California and New York have outlawed policies that prohibit employees from disclosing their wages to co-workers. Massachusetts and several cities (including, most recently, New York City) have passed laws prohibiting employers from asking prospective employees about their salary histories. Many states and localities are considering similar amendments to their pay equity laws. These laws have generated substantial controversy; Gibson Dunn represents the Chamber of Commerce for Greater Philadelphia in a challenge to Philadelphia’s new ordinance.
Relatedly, public interest in potential disparities in promotion rates continues, particularly in the technology sector. The EEOC published a report on diversity in the high tech sector, describing gender and racial disparities in leadership positions as "concerning trends."
Simultaneous with these legislative changes and related litigation and media attention, shareholders too have demonstrated interest in pay equity and promotion rates at public companies. Shareholder proposals requesting reports on efforts to identify and reduce pay inequities–primarily focusing on gender, with some including race as well–have increased dramatically over the last few years, from approximately a dozen in 2016 to more than two dozen in 2017 to date, according to Institutional Shareholder Services. The initial focus was on the technology industry, but it has expanded to retail, financial services, and insurance companies. Support for these proposals has varied, but one proposal at a leading technology company in 2016 received a majority support of votes cast–51.2 percent. Some shareholder proponents have been willing to withdraw these shareholder proposals when employers publicly issue reports regarding pay equity and commit to continued efforts to reduce any wage gaps.
In light of these developments and to minimize risk in this area, employers may wish to conduct privileged audits of employee compensation and related policies and practices and consider what changes, if any, might be appropriate to support fair and defensible compensation decisions. Employers should also be careful to ensure compliance with state and local pay requirements, which increasingly expand beyond federal law. For example, California’s Fair Pay Act now prohibits employers from using prior salary as the sole basis for future pay.
 17 C.F.R. § 240.21F-17 (2017). The SEC’s authority to promulgate this rule is subject to question. Eugene Scalia, Blowing the Whistle on the SEC’s Latest Power Move, Wall Street Journal (April 5, 2015), https://www.wsj.com/articles/eugene-scalia-blowing-the-whistle-on-the-secs-latest-power-move-1428271250.
 KBR, Inc., Exchange Act Release No. 74619 (Apr. 1, 2015), https://www.sec.gov/litigation/admin/2015/34-74619.pdf.
 See, e.g., Health Net, Inc., Exchange Act Release No. 78590 (Aug. 16, 2016), https://www.sec.gov/litigation/admin/2016/34-78590.pdf; Blue Linx Holdings, Inc., Exchange Act Release No. 78528 (Aug. 10, 2016), https://www.sec.gov/litigation/admin/2016/34-78528.pdf; Merrill Lynch, Pierce, Fenner & Smith Inc. and Merrill Lynch Professional Clearing Corp., Exchange Act Release No. 78141 (June 23, 2016), https://www.sec.gov/litigation/admin/2016/34-78141.pdf.
 Merrill Lynch, supra note 3.
 Blue Linx Holdings, supra note 3.
 U.S. Equal Emp. Opportunity Comm’n, Order: Revisions to the Employer Information Report (EEO-1) to Collect Summary Pay Data (Sept. 29, 2016), https://www.eeoc.gov/employers/eeo1survey/upload/eeo1-order.pdf.
 Cal. Lab. Code § 1197.5(a) & (e).
 Cal. Lab. Code § 1197.5(k)(1); N.Y. Lab. Law § 194(4)(a). The National Labor Relations Board has asserted a similar position. Employee Rights, Nat’l Labor Relations Bd., https://www.nlrb.gov/rights-we-protect/employee-rights (last visited May 3, 2017).
 Mass. Gen. Laws ch. 149, § 105A (2017), https://malegislature.gov/Laws/GeneralLaws/PartI/TitleXXI/Chapter149/Section105A; Phila. Code § 9-1131(2) (2016); Julia Horowitz, New York City Employers Won’t Be Able to Ask for Your Salary History Anymore, CNN Money (May 4, 2017), http://money.cnn.com/2017/05/04/news/economy/salary-history-new-york-law/.
 See, e.g., Jeff Murdock, Bill Would Address Wage Gap Between Men, Women, Delaware Online (Apr. 4, 2017), http://www.delawareonline.com/story/news/2017/04/04/bill-could-bar-employers-requesting-salary-history/100032176/; see also Horowitz, supra note 13 (noting that more than 20 states are considering legislation that would bar employers from asking applicants about prior pay history).
 Dan Packel, Pay Inquiry Bans to Get Crucial First Test in Philly, Law360 (Apr. 10, 2017), https://www.law360.com/articles/911609.
 U.S. Equal Emp. Opportunity Comm’n, Diversity in High Tech 2 (May 2016), https://www.eeoc.gov/eeoc/statistics/reports/hightech/upload/diversity-in-high-tech-report.pdf.
 Press Release, New York City Comptroller, After Outreach from Comptroller Stringer and NYC Pension Funds, Six Major Companies Agree to Gender Pay Equity Transparency (Apr. 4, 2017), https://comptroller.nyc.gov/newsroom/after-outreach-from-comptroller-stringer-and-nyc-pension-funds-six-major-companies-agree-to-gender-pay-equity-transparency/; Jena McGregor, The Investor Who Pushed Tech Firms to Publish Their Pay Gap Is Going After Big Banks, Washington Post (Mar. 23, 2017), https://www.washingtonpost.com/news/on-leadership/wp/2017/03/23/the-investor-who-pushed-tech-firms-to-publish-their-pay-gap-is-going-after-big-banks/?utm_term=.9a483d1ef7e9; Andrea Vittorio, Shareholders Ask Retailers to Mind the Pay Gap, Bloomberg BNA (Jan. 10, 2017), https://www.bna.com/shareholders-ask-retailers-n73014449531/.
 Gibson, Dunn & Crutcher LLP, Shareholder Proposal Developments During the 2016 Proxy Season (June 28, 2016), http://www.gibsondunn.com/wp-content/uploads/documents/publications/Shareholder-Proposal-Developments-2016-Proxy-Season.pdf.
 Cal Lab. Code § 1197.5(a)(3) & (b)(3).
The following Gibson Dunn lawyers assisted in preparing this client update: Jason C. Schwartz, Elizabeth A. Ising, Rachel S. Brass and Anna McKenzie.
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