What is a Release of Claims Agreement?
A Release of Claims Agreement is typically a contract that an employer might present to an employee, at either the beginning or end of their employment. This type of agreement essentially operates as a concession by the employee of his or her right to pursue legal action against the employer; in exchange, the employer provides some sort of benefit or concession to the employee . The fundamental purpose of such an agreement is to protect against the risk of litigation: if the employee knows that he or she has no right to sue the employer, then the likelihood of them doing so decreases. Generally, the majority of releases of claims agreements are proposed at the point of termination and are concerned with release of state or federal employment discrimination claims. However, similar agreements can be applied outside of the employment context, both to limit liability in a variety of contractual agreements and in settlement of future disputes.
Key Elements of a Release of Claims
The essential components of a release of claims usually include:
Identities of Parties
A comprehensive release of claims agreement must identify the parties to the agreement and must correctly reflect their identities, including full names, addresses, and, if relevant, places of employment. This is necessary to ensure a release of claims agreement is valid, especially in the context of employment law.
In addition, the individual signing the document must be the appropriate party to avoid allegations of misrepresentation or fraud.
For example, an employee might want to have his wife sign a release of claims agreement in connection with his termination. If the agreement releases his employer from all potential claims arising out of the employment relationship, the wife’s signature is not necessary because she was never a party to the employment relationship.
Legal Ramifications of Signing a Release
A release of claims agreement is a tool that allows the releasing party to waive its rights, or "release" claims that it has, or believes it may have in the future, against the released party. Generally speaking, an effective release will bar a party from asserting any claims against the released party after signing, whether brought as a complaint, a counterclaim, or an affirmative defense. In short, the claimed breach of a contract is an affirmative defense to a lawsuit based on the same facts.
A release of claims agreement also provides protection for the released party. In most cases, the receivor (or releasing party) has already received the benefit for which he/she/it is paying. The releasing party cannot pursue legal claims after signing the release.
Occasionally, a releasing party may not fully understand the rights being given up in a release. In those cases, courts typically hold that the releasing party is bound by the terms of the release. For example, in California, courts have said that an individual is not entitled to have an attorney present to ensure a release is executed knowingly and voluntarily, because it is a simple contract. See, e.g., Terex Corp. v. Heiden, 224 Cal.App.4th 196 (2014); Bowers v. Raymond J. Lucia Cos. Inc., 129 Cal.App.4th 1 (2015).
That said, a releasing party may not be bound by a release of claims agreement when duress or fraud is at issue. (duress examples are threats of physical harm, litigation, revealing embarrassing secrets). Factors courts consider include the existence of confidential relationship, the undue influence by one party over another, or wrongful use of coercive action. For fraud to apply, the misrepresentation must involve a material fact that is relied upon to enter into a contract. See, e.g., Baker v. Osborne Development Corp., 159 P.3d 174 (Colo. 2007); See also, Indus. Ind. Co. v. Fleischer, 819 P.2d 517 (Colo. 1991). While the showing requires something more than mere failure to read the contract, a contract can be void if the releasing party was unaware of the import of its terms.
When to Utilize a Release of Claims Agreement
A Release of Claims Agreement is beneficial and sometimes necessary in a number of situations. One of the most common instances is in the termination of an employee. In fact, a severance agreement is probably the most frequent use for a release of claims. A severance agreement is designed to get the employee to waive any and all claims against the employer and/or its owners so as to avoid any claims going forward. Your severance agreement may also be useful to protect your company from claims that have already arisen. For example, you may want to enter into a severance agreement with an employee you’re terminating even if she has not raised any claims during her employment. There are a number of reasons why a company wants to limit their exposure to claims that have not yet arisen. For one, we don’t know exactly what the former employee is telling other employees or prospective employers about her termination. We are also hopeful that the release will convince the employee that there is no point in filing suit.
Another situation where you would want to use a mutual release of claims agreement is in the context of a settlement of a personal injury claim. When settling a personal injury claim, it’s not only the injured party who needs to release any claims. If the person making the claim for damages is successful in his or her lawsuit, the defendant could be subject to claims by other family members for loss of consortium, etc. In addition, the defendant has claims against the injured party in some cases such as for property damage. Another good example of when to use a Release of Claims Agreement is in the context of a business dispute. However, it is also important to ensure that the Release of Claims Agreement addresses both parties and their potential claims. For example, a business owner who is being bought out by the company should ensure that he is releasing his potential anti-competitive claims against the company, i.e., that he is not going to compete with the company for the same business after he leaves. While there is no way to guarantee that the former employee or business owner does not compete or otherwise interfere with the business, a Release of Claims Agreement nonetheless affords some peace of mind to the business owner or company.
Advantages and Disadvantages of a Release of Claims
There are benefits and drawbacks to entering into a release of claims agreement. From the employee perspective, the major advantages to signing a release are:
• Receipt of additional severance or settlement monies
• Avoiding potential litigation risk and costs
• Receipt of favorable job references from the employer, if applicable
• Peace of mind in knowing with certainty that the matter is closed
Similarly, the main disadvantages to an employee include:
• Ability to waive any possible claims against the employer that may be worth millions of dollars in damages in the right case
• Agreement to keep confidential the compensation the employee received for signing the release
• Laboring under a fear of not being recouped for wages owed from the employer after the employee leaves employment — particularly , where the employee believes he/she has a claim for unpaid wages under applicable law
The employer’s major advantages come in the form of risk mitigation. For example, by entering into a release of claims, the employer can avoid litigation over how to proceed with a new direction given the employee’s past employment and ensure that the former employee will not actively solicit the company’s clients or employees — an act that could well destroy the business overnight.
From the employer’s perspective, the main disadvantages to entering into a release of claims agreement are:
• The release of claims does not prevent the former employee from becoming a competitor
• The payment of substantial money to the former employee in a severance package, possibly served as in part as a "buy-out" of any claims the former employee may have (or thinks he has) against the company
• Loss of evidence that the former employee — through his/her actions — was not a good fit for the company
Common Errors to Avoid
Many individuals and businesses draft or sign a release of claims agreement with little thought or care. They see it merely as a formality or paperwork. To the contrary, it is very important to understand what you are signing and the potential effects of the release of claims agreement. Some of the common mistakes to avoid are:
- Signing when it’s unnecessary: Many people, individuals and businesses, sign documents and agreements without understanding whether it is necessary to sign or if that makes sense to sign. Not all discrimination, harassment, fairness or overtime claims (for example) need to be signed off on. It is important to understand that not all claims require a release.
- Not getting something in return: Generally, you must give something in return for a release or settlement. If you don’t, the release may not be enforceable. You can’t just enter into a release of claims agreement and think that everything will go away.
- Release for severance or no severance: Many corporations and businesses use releases and settlement agreements as part of its termination process. For example, many employers will tell their employees that the employee will be receiving some severance. In return for the severance, the employer throws an agreement in front of the employee and says sign if you want the money. That’s not enough. You must understand the legal effect of what you are signing. Moreover, what happens if you need the severance money, but you don’t want to sign the agreement? Do you know what your options are?
- Not reading the agreement: Many people and businesses think that they don’t have the time or inclination to review the document. However, it is extremely important to read the entire document. Moreover, if it makes them more comfortable, they should take it to an attorney, spouse, advisor or other trusted individual.
- No negotiation: This often times goes hand in hand with a lack of understanding the legal effect of what is being agreed to. Many businesses just throw an agreement in front of an employee or individual to sign without any offer to negotiate, discuss or consider any suggestions. That is a mistake.
- Not understanding that the release only applies to those claims that arise as of the execution of the agreement: Many people believe that by signing a release agreement with a business or individual that they must waive all potential legal claims and are giving up all rights. That’s not true. Many releases generally only cover the claims that you have as of the date that you sign the agreement. Thus, if something happens after you sign the release agreement, you may still have claims and the agreement does not foreclose new causes of action. If you believe that the agreement extinguishes everything (even after you and the employer go back and forth), you must make sure it is clearly stated so there are no misunderstandings.
- Being surprised by the agreement: Individuals and businesses often have come across agreements that they never understood and don’t recall signing or agreeing to. Often times, they forget that they have signed an agreement only to be surprised when it comes out to bite them later on in a court of law. Whether it was your intention or not, the legal effect of the release agreement will remain and be binding.
How to Create a Release of Claims Agreement
A Release of Claims Agreement is an integral part of many employment terminations, and thus it becomes necessary to understand how to properly draft this agreement. An employer is well advised to have the Release prepared by their attorney, as there are certain statutory requirements which are necessary for the document to be enforceable.
Preparation
In drafting a Release of Claims Agreement, the first thing to consider is whether there is a collective bargaining agreement ("CBA") that might impact the drafting of the agreement. This is particularly true if the termination of the employee was due to layoffs or reduced workforce (which are also covered under a CBA). If so, special consideration will be needed to comply with the terms of that CBA.
While most employment terminations do not involve additional documentation because the employee resigns or quits, however, should an employer wish to provide some form of severance to the employee due to the separation of employment, it is then necessary to have a documented agreement signed by the departing employee. The Release will usually contain a waiver and separation agreement which provides a full and final release of all claims the employee may have against the employer. This includes a waiver of any and all claims arising at the time of the signing of the release.
Additional legal requirements will dictate that if the employee is 40 years old or older at the time of the signing , it is required to provide written notice of the proposed separation agreement to the employee at least 21 days before execution. The Agreement must also state that the Agreement has been provided to the employee prior to execution by the employer. A period of at least 7 days must be designated during which the employee may revoke the termination agreement after it has been executed. Finally, another written notice for revocation should be provided to the employee at the end of that 7-day period which states that the revocation period has expired and that the employer may proceed with paying out the severance package to the employee.
In addition, if the employee is covered by a collective bargain agreement ("CBA") the terms with respect to a release of claims between the employer and the Union should be reviewed for applicability. As noted above, terminations which are not the result of a layoff or a reduction in workforce are not necessarily governed by the CBA, but decisions involving layoffs or reductions in force that are controlled by the CBA may be subject to grievance under the CBA. Although this is more the exception than the rule, if there is a question as to whether a layoff or reduction-in-force is subject to the grievance and arbitration provisions of the CBA, consultation with labor counsel regarding a release of claims with affected employees may be warranted.