Settling employment claims and ending employment cleanly

Not every employment relationship ends the way either side hoped. Redundancy, disciplinary action or a claim of unfair treatment can leave an employee with a potential claim against the employer.

This document settles those claims, to the fullest extent the law allows, while preserving the duties that should survive, such as confidentiality and restrictive covenants. In return, the employee receives a termination payment.

It is usually less stressful and cheaper than litigation. But it only works if it meets the requirements of the jurisdiction in which it is signed, and those requirements differ sharply.

What it is called where

Jurisdiction note: terminology

US: A severance agreement or separation agreement and general release.

UK: A settlement agreement (formerly a compromise agreement).

Canada: A full and final release, usually alongside a severance or termination letter.

The validity requirements: the part that decides whether it works

United States

There is no single federal statute governing releases, but there are hard requirements where age discrimination claims are being waived.

Under the Older Workers Benefit Protection Act (OWBPA), a waiver of claims under the Age Discrimination in Employment Act is only valid where the employee is given:

  • 21 days to consider the agreement (individual terminations), or 45 days where the severance is offered as part of a group or exit-incentive programme: in which case the employer must also disclose the job titles and ages of the individuals selected and not selected
  • A 7-day revocation period after signing, which cannot be waived or shortened. The agreement is not effective until it expires.

Two further limits matter:

  • An employee cannot waive the right to file a charge with the EEOC, or to participate in an EEOC investigation. A clause purporting to do so is void, and drafting one can itself draw regulatory attention. You can generally waive the right to recover personally from such a charge.
  • The federal Speak Out Act (2022) makes pre-dispute non-disclosure and non-disparagement clauses unenforceable as applied to sexual harassment and sexual assault claims. It does not affect post-dispute settlement NDAs, but it does mean a confidentiality clause buried in an onboarding document will not cover these claims.

State law adds more. California requires specific §1542 waiver language to release unknown claims, and several states restrict confidentiality clauses in harassment settlements.

United Kingdom

Common law claims (breach of contract, wrongful dismissal, negligence) can be settled by any legally binding contract.

Statutory employment rights and discrimination claims cannot. Those can only be waived through ACAS conciliation or a settlement agreement meeting the conditions in section 203(3) of the Employment Rights Act 1996. The agreement must:

  • Be in writing

  • Relate to a "particular complaint" or "particular proceedings"

  • Be entered into after the employee has received advice from a relevant independent adviser on the terms and effect of the agreement, and its effect on their ability to pursue the statutory rights in question before an employment tribunal

  • Be advised on by someone holding a current contract of insurance or professional indemnity insurance covering the risk of a claim against them by the employee in respect of that advice

  • Identify the adviser

  • State that the conditions regulating settlement agreements have been satisfied

Fail these and the agreement will not settle statutory claims (unfair dismissal, discrimination, harassment), although it is likely still effective for contractual claims.

Canada

There is no statutory formula, but two principles do the same work.

Employment standards minimums cannot be contracted out of. The employee must receive at least their statutory notice or pay in lieu, and statutory severance pay where it applies, regardless of what the release says. Consideration for the release must be something over and above those minimums; otherwise there is no consideration for the waiver at all, and the release can fail.

Independent legal advice is not legally mandatory, but it is close to essential in practice. Courts will set aside a release where the employee was rushed, pressured, or did not understand what they were signing. Giving a genuine opportunity to take advice, and a reasonable period to consider, is what makes a release stick. Many employers contribute to the cost for the same reason.

Human rights claims can be released, but a release will be scrutinised where the circumstances suggest unfairness.

The other clauses that matter

1. Termination payment

From the employee's side, this is the heart of the agreement: what they receive in consideration of waiving their claims. The figure depends on length of service, salary, and the strength of the claim.

Set out clearly what the payment is, and how and when it will be paid. Spell out both parties' obligations for tax and social security contributions.

Jurisdiction note: tax treatment

US: Severance is generally wages subject to withholding and payroll taxes; allocation between wages and other categories should be handled carefully, and §409A deferred compensation rules can apply to payments deferred beyond a short period.

UK: The first £30,000 of a genuine termination payment may be tax-free, but PILON and other contractual sums are taxable as earnings. Spell out the tax and National Insurance position.

Canada: Retiring allowance treatment, withholding rates and any RRSP transfer eligibility should be addressed expressly.

2. Legal advice contribution

Jurisdiction note

UK: Employers commonly contribute in the region of £300 to £500. There is no statutory obligation, and the amount does not affect validity, but the employee must have taken advice for the agreement to work at all.

US: No requirement to contribute, and no requirement that the employee take advice. The OWBPA consideration period does the protective work instead.

Canada: No requirement, but a contribution (commonly a few hundred dollars) supports the argument that the release was informed and voluntary.

3. Company property

Phone, car, laptop. Are they returned, kept, or is there an option to purchase? And confidential information must be protected: the agreement should set out the employee's obligations to return or destroy it.

4. Benefits and pensions

Say what happens to benefits and pension on termination. In the US, address COBRA continuation coverage expressly, including whether the employer will subsidise any of the premium.

5. Waiver and release of claims

From the employer's side, this is the point of the exercise: the precise wording confirming the agreement is in full and final settlement of all claims the employee has or may have, and that they waive their right to bring them.

Note the limits above: the EEOC charge-filing right in the US, statutory minimums in Canada, and the s.203(3) conditions in the UK.

6. Withdrawal of existing proceedings

If the employee has already brought a claim, then once the agreement is signed they must notify the tribunal, court or commission and withdraw it. That obligation belongs in the agreement.

7. Employee warranties

Consider adding employee promises: that they are unaware of any circumstances justifying summary dismissal, or that they have not accepted another job offer at the date of the agreement.

Make the termination payment conditional on those warranties being true. That is what gives them teeth.

8. References

There is usually no obligation to provide a reference in any of the three jurisdictions, so you may prefer not to offer an agreed reference in the first instance. Where you do agree one, a factual reference confirming dates and job title carries the least risk.

9. Garden leave

If the employee is placed on garden leave before the termination date, include it. They continue to be paid and receive full contractual benefits, but are not permitted at the workplace. In Canada, remember this period generally counts towards notice.

10. Restrictive covenants

The employee may already have enforceable covenants in their employment contract, in which case reconfirming that they apply after termination is helpful.

If the existing covenants are out of date, unenforceable, or do not exist, consider adding them here, keeping them reasonable and not evergreen. Bear in mind the non-compete restrictions covered on the Employment Contract page: a covenant that is void in California, Minnesota or Ontario does not become enforceable because it appears in a settlement.

11. Confidentiality

Settlements are sensitive. Confidentiality and non-announcement provisions keep the existence of the settlement and the termination private, with limited exceptions: a spouse, professional advisers, or regulatory requirements.

In the US, keep the Speak Out Act in mind, along with state laws restricting confidentiality in harassment settlements.

12. Reaffirmation

Parties sometimes agree terms months before employment actually ends, for instance where the employee remains employed on garden leave.

In that gap, new claims can arise that the agreement does not cover, leaving you exposed despite having paid to settle everything.

The answer is a reaffirmation letter signed on or after the termination date, repeating the warranties and waivers.

UK: The employee must receive independent legal advice again on the repeated waivers, and their adviser must sign a further adviser's certificate on or shortly after the termination date.

US: A second release, with a fresh OWBPA consideration and revocation period where ADEA claims are in scope.

Canada: A fresh release supported by its own consideration.

Frequently asked questions

Does the employee have to take legal advice? In the UK, yes: independent advice from a qualified, insured adviser is a statutory condition, and without it statutory claims are not settled. In the US and Canada it is not mandatory, but the US OWBPA consideration and revocation periods, and Canadian courts' scrutiny of releases, serve a similar protective purpose.

How long does a US employee get to consider a severance agreement? Where ADEA claims are being waived: 21 days individually, 45 days for a group programme, plus a non-waivable 7-day revocation period after signing.

Can I stop an employee going to the EEOC? No. The right to file a charge or participate in an EEOC investigation cannot be waived, though you can generally waive their right to recover personally.

Can a Canadian release cover the employee's statutory entitlements? No. Employment standards minimums must be paid regardless, and the consideration for the release has to be something above them.

What if the agreement is signed months before the employee leaves? Use a reaffirmation on or after the termination date, with fresh advice or a fresh consideration and revocation period as the jurisdiction requires.

How Cloud Contracts 365 helps

Cloud Contracts 365 builds settlement, severance and separation agreements from a guided questionnaire that starts with the jurisdiction, then walks you through the requirements that actually decide validity: OWBPA periods and Speak Out Act limits in the US, the s.203(3) conditions and adviser certificate in the UK, and statutory minimums plus genuine opportunity for advice in Canada. Every agreement, certificate and reaffirmation is stored together.

Ready to see it?

Book a demo, and we will show you how to produce a compliant agreement without starting from a blank page.

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This page is general information and is not legal advice. Settlement, severance and separation agreements carry jurisdiction-specific validity requirements, and in the UK the employee must take independent legal advice. Take local advice on your specific circumstances.