Employee Settlement and Release Agreements

Avoid wrongful termination lawsuits by asking terminated employees to sign a release.

When an employer makes the decision to terminate an employee, the employer may require the employee to sign a settlement or release agreement as a condition of receiving a severance package or in an effort to resolve any legal claims the employee may have against the employer. These agreements are also known as waivers or severance agreements.

What Is a Release?

A release is a written agreement, signed by both the employer and the employee, in which the employee gives up the right to sue the employer for certain claims arising out of the employment relationship. In exchange to giving up this right, the employee receives something of value -- typically, a severance package. To be valid, a release must meet these requirements:

  • The release must be knowing and voluntary. This means the employee must know what rights he or she is giving up. To meet this requirement, the release should specifically list the claims the employee is being asked to waive. To meet the voluntary requirement, the employer must make sure not to pressure or coerce the employee to sign. The employee should have a reasonable amount of time to decide whether to sign the release.
  • The employee must receive something in exchange for the release. A release is a contract, and a contract is valid only if both sides get something of value in the bargain (called "consideration"). The employee must get something above and beyond what he or she is already entitled to. For example, if all employees get one week of severance for every year of service with the company, an employee who is asked to sign a release must get something more.

Beyond these basic requirements, some states have more rules, such as requiring the release to use certain language or appear in a certain size font.

Special Rules for Older Workers

If you are firing an employee who is at least 40 years old, the Age Discrimination in Employment Act (ADEA) requires you to include additional terms in a release. Among other things, a release of age discrimination claims must:

  • specifically refer to the ADEA in the release
  • advise the employee, in writing, to consult with a lawyer before signing the release
  • give the employee at least 21 days to consider the release before signing, and
  • allow the employee to revoke the release (in other words, to back out of the deal) for seven days after signing.

Mistakes to Avoid

One of the biggest mistakes an employer can make is refusing to pay the employee severance to which the employee is otherwise entitled if the employee refuses to sign the agreement. If the employer typically pays severance to employees who are not asked to sign a release agreement, the employer may not withhold severance from an employee who refuses to sign such an agreement.

Another mistake employers make is pressuring an employee into signing the agreement immediately. An employee who feels as though he or she was pressured into signing a release may have a claim for duress or coercion. To avoid such a claim, it’s best to give an employee plenty of time to decide whether to sign the agreement and to encourage the employee to have the agreement reviewed by his or her attorney before signing it.

Finally, some employers use release agreements that don't comply with state law. Some states have passed laws that require releases to include certain language, to be in a particularly prominent style or font, and so on. The purpose of these requirements is to make certain employees know exactly which rights they are giving up. Even if the release is well-written in plain English, a state court won't uphold it if it doesn't meet the state's requirements. You should always have a lawyer review your release agreement to make sure it complies with all applicable laws.

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