Preparing enforceable settlement documents outside of the settlement stipulation

When settling claims made by an employee or when drafting severance agreements, employers should take some steps to ensure that their General Release and Settlement Agreement will be enforceable. Remember that these agreements should always be between the employer and the plaintiff/claimant – the insurer preparing and executing these documents will not protect the employer/insured!

1. The Release Must Be Supported By Consideration – The employee must receive some benefit to which they were not otherwise entitled, even if it is some nominal amount. If an employer is including a confidentiality agreement, restrictive covenant, covenant not to sue, and/or a resignation agreement, separate consideration for each should be given and the amounts apportioned for each should be set forth clearly in the agreement.

2. The Release Must Be Knowing And Voluntary – Employers should use clear language that is easy for the employee to understand. Releases should specifically state that that the employee is entering into the release knowingly and voluntarily, and should note that the employee has been given an opportunity to discuss the Release with an attorney prior to executing the Release

3. Some Claims Can’t Be Released – Employees cannot be required to release future claims, and are typically precluded from releasing claims under wage and hour laws, whistleblower statutes, and unemployment compensation statutes. Employees also cannot be precluded from filing agency charges or from participating in an agency investigation. Such claims should be carved out of the Release and any applicable covenants not to sue.

4. Consider Tax Consequences – Severance payments are typically considered as wages to an employee, but monies paid to settle pending claims may be considered non-wage income. Employers should include language in the Release requiring the employee to indemnify the employer for any liability resulting from how the employer reports the amounts paid or withholds taxes from any payments under the Release

5. There Are Special Requirements If The Release Includes A Waiver Of Claims Under The Age Discrimination In Employment Act (ADEA) – Waiver of ADEA claims must be explicit and in language an employee can understand. Future ADEA claims cannot be waived. The employee must be given at least 21 days to consider the release, and the employee has seven days after signing the release to revoke it. If the release is being entered into in connection with a reduction in force (RIF), the employee must be given 45 days to consider the release, and certain statistical data regarding employees subject to the RIF must be included. With all ADEA releases, any amounts paid must be apportioned between those paid for release of the ADEA claims and those paid as consideration for release of other claims.