What is a release and settlement agreement?
A release and settlement agreement (or just "release") is a legal document in which one party agrees to relinquish any and all claims against another. In the context of an employment dispute, it will usually be executed in connection with an employee’s resignation or termination. Its purpose is to resolve the legal claims at issue in a mutually beneficial way that also limits the potential for future claims by the employee.
We’ll discuss the key elements of a release agreement in the next section . The availability of a release and its enforceability depend on the nature of the claims and the circumstances of the dispute. For instance, a release of claims under the Age Discrimination in Employment Act must satisfy special requirements. The agreement must be written in a way that is readily understood by the employee. Again, there are special rules for releases of rights under the ADEA. Releases negotiated by employees when they are still employed and before a dispute has arisen also may face additional scrutiny by the courts.
The key components of a release and settlement agreement
When drafting or reviewing a release and settlement agreement, both sides should ensure that it is a complete document. While there is no one-size-fits-all template for such an agreement, there are some common aspects shared by all effective "general releases," "settlement agreements," and "general releases of all claims." A release and settlement agreement must be appropriately drafted to be enforceable and shield the parties from future litigation.
The release is the core of the agreement, and sets forth the terms whereby one side releases any and all claims against the other side. The releasing party gives up the right to bring those future claims that arise from the same transaction or occurrence. Future claims may be barred under the doctrine of res judicata, and also precluded from future litigation on public policy grounds (i.e., the doctrine of res judicata is imparted to help conserve judicial resources). An effective release protects the releasing party from future litigation. It ensures that, by signing the agreement, the releasing party relinquishes any legal claims against the non-releasing party over the subject of the release. The language encompassing the release must carefully be considered by both parties.
Recitals should set forth the parties to the agreement, and a few facts concerning why the parties are entering into the agreement. Recitals are helpful because the courts may look to them when interpreting a contract or determining intent of the parties. Typically, recitals are included in every contract, but are particularly important in a release. This is because the plaintiff (releasing party) may argue that it could not release "unknown" claims due to mutual mistake.
The parties each give consideration to one another, and the release should set forth the consideration in exchange for the release of claims. The major question is what to give as consideration. Essentially, consideration is what is given by each party to the other. The same consideration can be (and often is) given on both sides. However, consideration does not need to be equal. It can be something tangible, or intangible. Under California Civil Code ยง 1605, the following things serve as consideration: an act, a forbearance to act, creation of an obligation, or a change in a legal right.
The legal advantages of a release and settlement agreement
Entering into a release and settlement agreement may be beneficial to all parties involved. One significant advantage of such an agreement is finality. Absent other issues, if both parties agree that the agreement resolves all their disputes, they will have certainty that no further disputes can arise. In contractual negotiations, certainty about one’s obligations enhances business confidence.
A settlement agreement also frequently gives all parties better control over legal fees. This assumes that the costs associated with litigation are higher than the pre-litigation costs or that the settlement agreement settles more than the plaintiff’s initial claims. Finality and control over the amounts on the parties’ respective balance sheets encourage companies to spend less on litigation. Even if the legal fees incurred in a settlement agreement continue to be high, the commencement of the litigation can cause a temporary spike in the parties’ legal costs. By culturing a resolution of disputes, a release and settlement agreement affords the parties the ability to forecast and manage their legal fees better than by starting litigation that could be high-stakes.
When is a release and settlement agreement appropriate?
While there are countless contexts in which release and settlement agreements play a significant role, the following are some of the most common scenarios: Employment Disputes. Many, if not most, employers have employment agreements, offer letters or employer handbooks that provide for waivers of claims. But surprise terminations and other employment disputes abound. As a result, businesses commonly enter into releases with employees, former employees or independent contractors when an employment relationship comes to an end. The agreement is usually negotiated through a combination of letters and an exchange of offers until both parties agree on a final version. Employers almost invariably insist on including a diligent effort to recoup property or equipment in good condition, ensuring payment of any additional wages or commissions, assigning intellectual property to the company, providing confidentiality and other post-employment covenants protecting items that came about through the employment, and limiting future competition by the individual. The individual is typically given the opportunity to have counsel review the agreement and, in the case of an employment relationship that terminated after a year or more of service, to review it for an appropriate period of time, up to 21, in appropriate circumstances, up to 45 days. Personal Injury cases. In the settlement of any personal injury matter, insureds for a defendant will generally only have the private attorney work through the process up to the point of the tender of the insurance policy limits. After that point, the case is generally tendered to a designated representative of the insurance company, who usually is a private law firm employee. That attorney then handles the case on behalf of the company, but reports to the insurance company. If the amount of the claim exceeds the policy limits, the insured may be held personally liable for any amounts in excess of the insurance policy. As a result, once the policy coverage is tendered, insurers and insuring corporations require release and settlement agreements in an effort to limit their own liability and that of the insured for payments to plaintiff in a personal injury or wrongful death action. Moreover, upon receipt of the release and settlement agreement, the insurance companies are notified that the plaintiff can no longer pursue the insured individually for untendered amounts. Some courts require release and settlement agreements even before tender of policy limits to an injured plaintiff. Also, there may be instances when defendants without any insurance coverage might enter into release and settlement agreements with plaintiffs in order to avoid an entry of judgment or other enforcement action.
Legal requirements and considerations
Effective Release and Settlement Agreements must comply with many legal requirements, and particularly when settling wage and hour claims.
Enforceability. Breaching a settlement or agreement can give rise not only to a breach of contract claim but may be the basis for a fraud claim or other claims, and also entitling an aggrieved party to seek attorneys’ fees. Breaching a settlement can even be the basis for subsequent criminal liability. For example, an employer trying to avoid having to pay a settlement it agreed to is treading into perilous legal waters.
Employees cannot waive certain rights. With particular respect to wage and hour settlements or settlements relating to discrimination and harassment, the law prohibits employees from being able to "unilaterally" waive certain rights. Rather, to be enforceable, they require that the employee signs the waiver first before the employer has made a final decision, and then the employer "contemplates" and accepts the waiver. This is a very "unfortunate" trap for both employers and lawyers who fail to take this requirement into account.
There are many more legal requirements and considerations made by statute, case-law or common sense, for example the release should be signed in an uncoerced environment. A release provision or provision that could be construed to have a release must be written in language comprehensible to the ordinary person. Various additional laws influencing what should be settled apply, e.g. the Older Workers Benefit Protection Act applies to waiver of claims under the Age Discrimination in Employment Act.
Other jurisdictions have an increasing number of laws, regulations, and rules addressing settlement agreements, such as the federal requirement in the context of federal claims that a plaintiff/employee have at least 21 days to consider the proposed agreement and a seven day right of rescission; and similar state law requirements.
A lawyer or employer who "used" or "uses" boilerplate without recognizing the need to adapt it to the situation can be perilously exposed. The contract can be void if major terms are missing or not clearly covered, and damages can be massive.
How to draft a release and settlement agreement
Whether litigating a lawsuit to judgment or agreeing to a pre-litigation settlement, employers should insist upon written settlement agreements with employees in order to reduce the risks of future costly litigation. Written agreements can have particular importance when employment is terminated without an obvious breach of contract that would result in damages. Accordingly, any such agreement ought to include an explicit release of claims and, ideally, a provision requiring arbitration for all disputes "arising out of" the employment relationship or the employment contract. The following are some best practices to keep in mind when drafting a settlement agreement: Any contract dispute can be costly to litigate . Comprehensive settlement agreements, especially those encompassing a release, arbitration, nondisparagement, confidentiality, and "carve-out" provisions can help to reduce risk. Likewise, agreement on severance and consideration – including payment terms and considerations other than money (e.g., references, insurance, letters of recommendation, etc.) – can be helpful in resolving potential disputes. When properly drafted, settlement agreements can help your organization provide certainty and resolution to what otherwise may be long and costly disputes in order to protect your business.
Pitfalls and common mistakes when using release and settlement agreements
The first of these inevitable mistakes is failure to properly identify and clarify the parties to the agreement. Sometimes a settlement agreement will reference another agreement to which it should be read in conjunction but doesn’t make a proper reference or doesn’t make it clear whether that agreement supersedes the settlement agreement or vice-versa. Too many parties leave themselves open to construction issues by not referencing prior agreements, or by doing so awkwardly in ways that lead to arguments about the context the provision must be read in. Just look to American law on implied indemnification for the confused and contradictory case law that can emerge if there isn’t any clear, explicit language. The same issue can happen in multiple areas of law, not just the example I gave you.
People too often also leave out background provisions that provide much of the scope and context of the rest of the agreement. For things like severance agreements and vacating clearances prior to sale, there is so much detail about providing this context and delineating a separation process that is fair to everyone. But it’s harder to make clear in similar situations where someone is being let go, or their position eliminated, that the person’s past work is important even if they aren’t going to be formally working for the company anymore. Just because someone stops doing something on Monday doesn’t mean they stop thinking about it on Wednesday much less when someone is asking a complex follow-up question three months from now. It’s not a given that a former employee will have the same priorities or thought process as the employer does, especially since it’s not that employee’s company anymore. It’s not my fault, people forget things, and then it’s a painful argument about whether I had a duty to remember things from back in the day.
Your severance agreement also needs to make clear how it impacts any ordinary insurance coverage or other payment obligations under applicable law. The severance agreement can’t contract out of statutory obligations where there are none, but you can’t really make sure you have contractors rather than employees and thus workers compensation liability with such an agreement, but you do have the ability to make clear that an IRS accountant was never your employer and the IRS has no authority to argue that they were. The drafting is often so imprecise that the coverage arguments end up being difficult ones and you’ve already lost that money at that point so you don’t want to be in a position to test those interpretations at that point when you could have written this clearly onto the severance agreement. Again, it’s not really fair for that employee to get confused over an issue like that, but it happens nonetheless, and it’s a primitive human reaction that can’t just be ignored.
Finally, courts offer all kinds of ways to get around any release you have by arguing that you can’t release your statutory rights and responsibilities, and why would you want to? If you haven’t spoken with an attorney, you’re probably not prepared for what courts have allowed. The employee can give up their right to sue you, but they can’t give up the government’s right to sue or collect a statutory payment, so you can’t do anything with that and you need to be prepared for that eventuality. Other governments can assert claims to the government entity involved, and that’s not really a problem between you and your former employee, but it’s always a hassle to have to deal with the government correcting the mistakes of your former employee when they could have just packed it up and gone home as was the original intention.
Your severance agreement also can’t be so broad as to include purely punitive damages or restitutionary relief or anything that is otherwise determined to be contrary to public policy. So what you thought you booked as 20 days of vacation into your statutory settlement agreement might be treated as a penalty instead. In some cases, some judges have literally refused to enforce agreements at all if they think they’re contrary to public policy and it’s already cost you thousands in attorney’s fees to fix so sometimes it’s better just to make your argument fresh for the next fight you’re having than to open a new one about something that could just be handled.
When should you enlist legal advice?
There are many reasons why you will need professional legal advice: your age, health and income status; your length of employment; the amount of severance payable; the enforceability of the release and settlement, as well as the validity of any provision therein; other employment or post-employment entitlements; the existence of employment contracts, policies or entitlements; and the enforceability of restrictive covenants and non-disclosure clauses. The receipt of any continuing benefit from the employer is also a key factor to consider, as this will often mean that the employer could attempt to enforce the release and settlement agreement.
The time at which you should consider and obtain legal advice relating to your proposed release and settlement agreement is also critical. Many directors and officers find themselves facing a take-over bid by a newly formed company, where the director or officer is asked to resign in consideration of a compensation package. If the former director or officer signs the release and settlement agreement in the midst of hostile negotiations and in anticipation of future legal proceedings with the new company resulting from the business transfer, he or she is essentially foreclosing on any right to commence these legal proceedings, unless otherwise stipulated in the agreement. Whether or not to sign the release and settlement agreement at such an early stage and under coercive circumstances is ultimately a question that must be determined in consultation with a lawyer.
Conclusion: the necessity of customized release and settlement agreements
It is critical that an injured worker does not merely see a generic release and settlement agreement template. The document must be customized based on the circumstances of the specific case. For instance, the special rules for trying a contested claim for permanent disability do not apply whenever the insurance company and injured worker agree on the amount due for such a claim. The rule that settling a claim for an aggravation of a previously settled workers compensation case requires the approval of the state Workers Compensation Commission does not apply when the parties are settling the claim for the aggravation and/or the new work injury in a single agreement. There are a handful of other procedural requirements which only apply in specific situations and not in others. Furthermore, nearly every settlement agreement will have specific waivers and releases that only apply to the assessment of certain penalties. Those issues are usually addressed in the circumstances of the particular case . There are a total of more than a dozen different rules, statutes, case law and administrative code provisions that apply to some aspects of release and settlement agreements but not others.
To make sure that your agreement meets the requirements of the particular situation, it must be prepared by an experienced employment lawyer with the appropriate knowledge and skill. He or she must understand the nuances of the law applied to each situation in agreement preparation. Injured workers should not assume that the insurance company and lawyers already know the law applicable to their situation regarding the settlement of their workers compensation case. Likewise, an injured worker must never sign a settlement agreement or release without understanding its full implications. An experienced attorney representing injured workers in North Carolina will always review and explain the content of settlement agreements and releases. He or she will offer a written explanation of certain rights and/or potential claims that will be forfeited in the settlement. Counsel will be aware of many special considerations and issues that must be addressed in a settlement.