Posted on May 20th, 2021
Below is a complete transcript of this video.
What’s up fellow entrepreneurs, it’s John Fagerholm again, and today I want to talk about settlement agreements and a few places that could potentially cause problems for you if not handled correctly as always I’m an attorney, but I’m not your attorney.
So please seek competent legal advice for your specific problem or legal questions. And for this video specifically, I urge anyone that requires a contract with an employee, especially a contract that is made to settle a dispute or release claims to be drafted by an experienced attorney.
This video by itself will not give you enough information or guidance to draft the agreement yourself and will not likely protect your interests. So first let’s talk about contracts in general. So most, most contracts have three basic parts of third or so of the contract is usually boiler plate terms that you find in any contract.
And then another third is usually a terms that are specific to that type of contract or that industry. And then the last third is usually specific to the parties.
There are several different types of settlement agreements between employees and employers, but they all essentially serve the same purpose, which is to release liability for the employer and exchange for some consideration. And that consideration is usually money.
So, um, and there are specific requirements that could potentially invalidate a settlement agreement with your employee, even if you know, if not handled correctly. So the first common mistake I see is in the consideration, given to the employee in exchange for the release, let me give a real world example.
Let’s say that an employee notices that they have not been paid their overtime several times and they want to be paid back. So you as the employer want to pay them back, but you also want to avoid any liability by having them sign a release for the mistake.
Now let’s say the employer pays the back pay in exchange for the employee signing an agreement that releases the employer from the claims. Is that a valid agreement? Well, not likely. And here’s why remember every contract requires consideration from both sides to be valid.
If the employer is receiving a release of claims, that’s consideration, well, what is the employee receiving the money that was already owed to them in this example, um, already belongs to them well, if that money already belongs to the employee, the employee has not received any consideration. So that would make the contract invalid.
So it’s very technical, but that’s, that’s why people get caught in this trap. The other question I get about this is then if, if you’re going to pay them back anyway, why bother entering into a settlement agreement? If the employer you know, if you’re just going to have to pay extra money?
Well, the, the, the short answer is to release the liability when an employee is not paid correctly and on time, there are penalties fines, interest in legal fees on top of what’s owed. So it’s worth paying some amount, an additional consideration to potentially avoid a lawsuit or labor board claim that could cost you much, much, much more.
The second mistake I see often is language that releases claims that cannot be released as a matter of law. So for example, workers’ compensation being the most prevalent because of the high cost of workers’ compensation.
Some employers have tried to have employees release them from workers’ compensation claims and settlement agreements outside of the workers’ comp forum. So any paragraph releasing workers’ comp claims or even a settlement agreement based on a workers’ comp claim is invalid. If it was settled outside of the workers’ comp compensation appeals board was just the way it is.
So the best you can do in a settlement agreement outside of the workers’ comp form is to have the employee Warner represent that they do not have any injuries that they have not already reported. So, this is not a release and the employee can still file a workers’ comp claim, but at least you’ll have some evidence to refute the claimed injury.
And finally, the third mistake I’ve seen that can invalidate a release of claims is the 40 and under rule. Believe it or not, California thinks that people 40 years and over do not have the same capacity to enter into contract contracts as people under 40.
So you’re selling a claim with an employee that is 40 years or older. Um, you must have language in the settlement agreement that first of all informs them and also allows them 21 days to review, um, and accept or reject the contract.
Then after they have accepted the contract, you know, even if it’s before the 21 days, you have to give them another seven days to void the contract, even after they’ve signed it. So it seems ridiculous to me that 40 is the number, but it is what it is.
The trick here is to make sure that you have a clause in the settlement agreement, um, that you had that clause in that settlement agreement and that you do not pay the settlement consideration until after the seven days have passed.
So don’t pay them when they sign it, wait until the seven days, if you don’t do that, you could be put into a situation where you pay the consideration. The employee takes the money and then voice the contract within the seven day timeframe.
Now you’re still liable for the claims because they’ve voided the contract, but you’ve paid money that you’ll not likely get back.
All right. So what are the takeaways? So number one, first takeaway settlement agreements are valuable because they have released additional liability on top of amounts that are potentially owed to an employee.
Number two, you have to pay some amount of consideration for the employee releasing their claims. And three, there are several statutory claims such as workers’ comp that cannot be released. And finally, the fourth one employees over 40 should not receive their settlement amount until seven days after they have signed an agreement to release claims.
So, um, again you know, if you’re going to enter into some sort of agreement with an employee, make sure an attorney looks at it and I hope this helped a little bit, and that’ll be it for this video.
As always be productive.
