Foot Locker Fined for 'Pretaliation' Clauses in Severance Agreements

SEC Targets "Pretaliation" in Severance Agreements

Foot Locker recently settled with the Securities and Exchange Commission (SEC) for $148,000 due to the inclusion of "pretaliation" language in its employee severance agreements. This language, present from July 2020 to June 2024, required departing employees, primarily senior executives and those in finance, legal, and supply chain roles, to waive their right to receive whistleblower awards as a condition of receiving severance pay. The SEC views such clauses as an attempt to deter potential whistleblowers and a violation of the Dodd-Frank Act and its associated rules, even if the company never actively enforced these provisions. The penalty of $1,000 per offending agreement underscores the SEC's continued vigilance in this area.

The Nuance of Whistleblower Rights

The core issue identified by the SEC was not that Foot Locker's agreements prevented employees from filing a charge or participating in an investigation. Rather, the problematic clause stated that by signing, employees waived their right to any monetary or other benefits resulting from such actions. This conditional waiver, linking severance to the forfeiture of potential whistleblower awards, was deemed by the SEC to create an impediment to participation in its whistleblower program. This highlights a crucial distinction for audit professionals: simply allowing an employee to report an issue is insufficient if the agreement simultaneously disincentivizes them through financial penalties or waivers.

Proactive Compliance and Remediation for Internal Audit

For internal audit and compliance teams, this case reinforces the ongoing need to proactively identify and eliminate "pretaliation" language from all employment-related documents. While Foot Locker began phasing out the problematic language before SEC contact, the delay in full remediation still resulted in a fine. Key actions for audit professionals include:

• Reviewing and updating codes of conduct and employee policy manuals to explicitly affirm employees' unfettered right to report concerns to regulators.
• Amending all template agreements, including new hire, severance, and retention agreements, to remove any clauses that could be interpreted as restricting whistleblower rights or awards.
• Conducting audits of template agreements, especially in decentralized or international operations, to ensure consistency and compliance.
• Considering outreach to former employees who signed agreements with problematic language to inform them that such restrictions are void.
• Extending this review to agreements with third parties, such as customers or business partners, as the SEC has previously taken enforcement action in those contexts as well.

The Foot Locker settlement serves as a clear signal that the SEC remains committed to enforcing whistleblower protection rules. Internal audit functions play a vital role in ensuring that their organizations' policies and agreements fully support and protect whistleblowers, thereby mitigating significant regulatory and reputational risks.