Release of Claims: Kentucky Supreme Court upholds validity of employment releases
Colleen Blose was an employee in the mail distribution department of Humana Inc. On January 5, 2001, she was let go in a departmental reduction in force and outsourcing. On that date, she received and signed a document titled "Release and Agreement," which provided:
The above [severance pay and payment for insurance] is accepted in full and final release and settlement of any and all claims of any type relating to your employment or separation from employment which you may have against Humana or any of its officers, agents, employees or affiliates. You agree to bring no lawsuits, claims, demands or charges of any kind, whether in tort or contract, or pursuant to any federal, state or local ordinance or statute, relating to your employment or to your separation from employment.Blose later received the severance pay and benefits provided in the release.
Approximately three years later, on September 30, 2004, Blose filed a civil action against Humana in Jefferson Circuit Court seeking damages for alleged employment discrimination in violation of the Kentucky Civil Rights Act and outrageous conduct based on alleged incidents occurring during her employment. The company asked the court to dismiss the case because the release was valid and enforceable under state law. Therefore, it should be enforced as a release and waiver of any and all claims that she had or may have had against the company.
On February 24, 2005, the court found that Blose had knowingly and voluntarily entered into the release, she had received full consideration (i.e., something of value in return for signing it), and its terms should be enforced.
Court of appeals reverses
The central issue in Blose's appeal to the Kentucky Court of Appeals was whether the agreement was a valid and enforceable contract under Kentucky law in light of the facts and circumstances surrounding her signing of it. Without deciding that issue and the merits of her asserted defenses to enforcement, the court decided to return the case to the circuit court for additional pretrial fact-finding. Blose would have extra time to obtain proof that she didn't knowingly and voluntarily enter into the release.
However, the court of appeals' opinion didn't end there. It also asked the trial court to pay attention to the holding in Curtis v. Belden Electronic Wire & Cable, 760 S.W.2d 97 (Ky. App., 1988). In relevant part, the opinion stated that the:
remedy for the breach should have been an original action or counterclaim for recovery of damages incurred as a result of the breach.Essentially, it provides that for breach of a release agreement, an employer can sue for breach of contract only in a counterclaim or a subsequent lawsuit. If that's the only remedy, does it mean that the employer in the initial action can't raise the release agreement as a defense and simply ask the court to dismiss the employee's lawsuit? Fortunately, the Kentucky Supreme Court said no.
Supreme court upholds validity of release
The supreme court, overruling earlier precedent and reversing the court of appeals, found that a validly executed release waives the employee's right to sue and that an employer may have the case dismissed when an employee sues after signing one. It also held that a release "extinguishes a claim or cause of action." Applying those principles, the court concluded that a validly executed release waives a former employee's right to sue and that the remedy for violating that agreement is dismissal of the case. Thus, an employer isn't required to file a counterclaim or initiate a separate lawsuit alleging breach of the release to enforce it.
This decision should give Kentucky employers more confidence when presenting an employee with a release agreement. Unless the employee can show fraud, duress, or bad faith in executing the agreement, you can enforce it and have the case dismissed. Humana v. Blose, 2008 WL 746464 (Ky., 2008).
Will your release agreement hold up in court?
A properly drafted release and a covenant not to sue are valuable assets when it comes to severing ties with employees. However, the law regarding releases is constantly changing, and the facts are unique to the separation of each employee. For those reasons, you should think twice before reusing old release forms. It's always prudent to consult with counsel for guidance in drafting a release that will hold up in court and protect you from potentially costly lawsuits.
Here are few key points to keep in mind when considering a release agreement.
- Is the employee age 40 or older? If so, special rules apply regarding notice, time allowed for review, and the right to rescind the agreement.
- Is there independent consideration for the release? In other words, is something of value (in addition to what the employee is already owed) being provided?
- Provide time for the employee to review the agreement and seek legal counsel.
- Have tax issues been addressed regarding payment to the employee? Payments made as wages (or in lieu of wages) are generally subject to normal payroll withholding. If the payment represents something other than wages (i.e.,emotional distress or attorneys' fees), then it will receive different tax treatment. Counsel should be consulted regarding appropriate tax treatment of the payment.
- Have confidentiality and noncompetition issues been considered?
- Are there other agreements between you and the employee that need to be addressed in the release?
When it comes to release agreements, we don't recommend the cookie-cutter approach ― it could lead to invalidation of the agreement. Each release, like the termination itself, should be carefully considered, and legal counsel should be consulted.
If you have any questions or need help, please contact any member of the Greenebaum Doll & McDonald Labor and Employment Department.
Copyright 2008 M. Lee Smith Publishers LLC
KENTUCKY EMPLOYMENT LAW LETTER does not attempt to offer solutions to individual problems but rather to provide information about current developments in Kentucky employment law. Questions about individual problems should be addressed to the employment law attorney of your choice.