Employers enter into agreements with employees to settle threatened claims or litigation, and to resolve any potential claims, such as at the time of a layoff or discharge. The primary goal of these agreements is to resolve active disputes or potential claims.  

Congress, the state legislature, agencies and courts have imposed a number of requirements and restrictions, which employers must consider when drafting these contracts.  Some are new. For example, effective January 1, 2019, the California legislature prohibited releases of certain civil rights claims as a condition of employment, or in exchange for a raise or bonus. The legislature also restricted the use of confidentiality agreements within release agreements.  

Other rules are not new.  For example, by law, employers generally may not compromise claims for unpaid wages that are concededly due employees. Releases of federal age discrimination claims must comply with detailed rules under federal law. There also are issues that are not unique to employment law, such as how to release unknown claims, the enforceability of restrictions on competition, choice of law provisions, and more.   

The following are some do’s and don’ts concerning separation and settlement agreements for employers.

Must-Have Provisions

Like any contract, a release should be supported by new, valid consideration. A release agreement should acknowledge that the employee otherwise is not entitled to the amount paid. The agreement also should state that all earned wages have been, or will be, paid, to avoid later claims for unpaid earned wages.

A release agreement usually should include a general release of all claims arising from employment, against not only the employer entity but also related entities, employees and representatives.  Releases of civil rights claims, such as under Title VII of the Civil Rights Act of 1964, or the California Fair Employment and Housing Act, must be “knowing and voluntary.”  Therefore, it is good practice to list these statutes in the release, and ensure the release is drafted to be understandable, particularly if the employee is unrepresented.

Certain claims cannot be released, including claims for earned wages, reimbursement for business expenses, unemployment and COBRA benefits, and worker’s compensation benefits (except if approved by the Workers’ Compensation Appeals Board).

California Civil Code section 1542 states that a general release of all claims will not apply to claims that are unknown to the claimant, if the claimant would not have signed had he or she been aware of the unknown claims.  However, that provision may be waived.  So, it is important to specify that the release extends to both known and unknown claims. It is customary and good practice to quote Civil Code section 1542, to help establish the waiver of that section is knowing and voluntary.

The federal Older Workers’ Benefit Protection Act (“OWBPA”) and detailed regulations impose specific requirements for releases of federal age discrimination claims, by employees age 40 and over.  The requirements include (a) minimum time of at least 21 days (45 days for group terminations) to review and accept the agreement (b) a 7 day period after execution of the agreement to revoke acceptance, (c) language advising the employee to consult with an attorney, and (d) clear, understandable language throughout the agreement.  The consideration for the waiver of federal age discrimination claims must be more than that to which the employee otherwise would be entitled.

Preserve the employee’s right to file a charge with and testify before a governmental agency:  The agreement should state that it does not preclude the employee from filing a charge with any government agency or cooperating in any such investigation, but the employee will not be entitled to any recovery or relief in any such proceeding.

Additional Provisions to Consider

Release agreements often require the employee to maintain the confidentiality of all aspects of the settlement, sometimes including even the underlying factual allegations.  These provisions must conform with limitations new federal and state laws impose. 

Payments in settlement of sexual harassment claims that include a confidentiality provision will not be deductible as a business expense under federal law. Under California law, the settlement of sexual harassment and other related claims cannot prevent disclosure of factual information pertaining to claims filed in court or before an administrative agency.  This law does not prohibit a provision that prevents the parties from disclosing the amount of the settlement. In addition, at the claimant’s request, the agreement may include a provision that limits the disclosure of the claimant’s identity, including facts that would lead to discovery of the claimant’s identity.

Another new California law prohibits any provision in a settlement agreement that prevents a party from testifying about criminal conduct or sexual harassment in an administrative, legislative, or judicial proceeding, so the agreement should expressly state that nothing in the agreement restricts such testimony.

A settlement agreement can include a provision that any disputes must be resolved by binding arbitration.  Arbitration has advantages and disadvantages, and this may be an issue to review with your counsel.

Choice of law and forum selection: Particularly where the employer operates in many locations, it can be useful to specify which state’s law will apply, and the location in which any action to enforce the agreement must be brought. However, California courts may not enforce a provision designed to evade California’s protections. 

Some employers may wish to include an agreement that the employee will not re-apply for employment, and will not take action if employment is refused. There are certain employee-relations and legal concerns with these provisions. So it pays to consult with counsel about these provisions.

Don’t Include

As discussed above, some claims cannot be waived under California law and should not be included within the scope of the release.   

In California, most non-competition, no hire, and non-solicitation provisions are unenforceable.  Including these provisions may result in a challenge to the enforceability of the agreement.