Broad Release Of Claims In Severance Agreement Not Enforcable As To Some Claims

It is typical these days for an employer to require an employee to sign a broad release during his or her exit interview in order to receive a severance payment. But are these releases valid and enforceable? The California Supreme Court recently answered that question in the case of Edwards v. Arthur Andersen, LLP (Decided August 7, 2008).

The typical severance agreement uses broad language to describe the claims that the employee is giving up, often using the phrase "any and all actions, causes of action, claims, demands, debts, damages, costs, losses, penalties, attorneys’ fees, obligations, judgments, expenses, compensation or liabilities of any nature whatsoever, in law or equity, whether known or unknown, contingent or otherwise, that Employee now has, may have ever had in the past or may have in the future against any of the Released Parties by reason of any act, omission, transaction, occurrence, conduct, circumstance, condition, harm, matter, cause, or thing that has occurred from the beginning of time up to and including the date hereof, including, without limitation, claims that in any way arise from or out of, are based upon or relate to Employee’s employment by, association with or compensation from [Employer] or any of its affiliated firms"

Now, this is pretty broad language, and you might think that this would include even claims that the law says cannot be released, such as indemnity rights that an employee has against his or her employer for following the directions of the employer. In this particular case, the employee was a former employee of Arthur Andersen, the big accounting firm that got caught up in the mess with Enron - remember the news stories about the accountants shredding documents?

Well, the employee was concerned that he would be sued and did not want to have to give up his right to have Arthur Andersen indemnify him for whatever he did in the discharge of his duties as an employee.

As it so happens, Labor Code Section 2803 gives every employee a statutory right to be indemnified by their employer for doing things that the employer tells them to, even if the actions are unlawful, unless the employee believed they were unlawful when he obeyed his employer's directions. This right under the Labor Code to indemnity is one that can't be waived. In fact, Labor Code section 2804 voids any agreement to waive the protections of this Labor Code So, the question was whether the release the company required him to sign in order to get his severance was an agreement attempting to waive the protections of the Labor Code and therefore would be void.

Interestingly, the California Supreme Court ruled that the release of "any and all actions, causes of action, claims ..." does not mean what you and I might think it does - it does not include "any and all" claims. Specifically, the court held that the term "any and all" does not include nonwaivable statutory protections and in particular does not apply to an employee's right to indemnification from the employer. Suprised? Well, so was Mr. Edwards. After all, he had refused to sign the release based on the fear that Arthur Andersen would refuse to indemnify him later.

The majority of the Court reasoned that since it is a public policy to interpret contracts so as to make them lawful, and it was well known that you cannot waive the Labor Code protections, the broad language of the release could be construed as waiving only those claims that are lawfully waivable (even though the release does not explicitly say so). The court also rejected the suggestion that any ambiguity on this point could have been easily cured by drafting the release with the language "except as otherwise prohibited by law."

Now, I wouldn't count on the court to analyze every contract this way, by reading into the contract provisions of law that are not referenced in the agreement and which, on the face of the agreement, appear to be at odds with its terms. There certainly are cases where the courts have invalidated entire agreements because they contained terms that were illegal. But, if you are dealing with a severance release, you can count on this decision to preserve your non-waivable rights under the labor code, despite broad release language referring to "any and all" claims.