Severance Agreement Was Valid Because It Did Not Actually Release Employer From Unknown, Future Claims

CATEGORY: Client Update for Public Agencies, Nonprofit News, Private Education Matters
CLIENT TYPE: Nonprofit, Private Education, Public Employers
DATE: Jun 06, 2023

Elizabeth Castelo worked for Xceed Financial Credit Union as its Controller and Vice President of Accounting.  In November 2018, Xceed informed Castelo she would be terminated effective December 31, 2018. On November 19, 2018, the parties entered into an agreement entitled “Separation and General Release Agreement,” in which Xceed agreed to pay Castelo a severance in exchange for a full release of all claims, including “a release of age discrimination claims that she has or may have under federal and state law, as applicable.”

The release extended to all claims known and unknown “arising directly or indirectly from Employee’s employment … [and] the termination of that employment” including claims for wrongful discharge, violations of public policy, and violation of FEHA.

Castelo and Xceed signed the Separation Agreement on November 19, 2018.  Castelo continued to work through the date of her separation, which was December 31, 2018.  The parties intended that Castelo would sign another release covering this extra period of employment on the date of her separation. However, Castelo mistakenly signed the extension release the same day she signed the Separation Agreement.

The following year, Castelo filed a complaint against Xceed alleging age discrimination and wrongful termination in violation of FEHA. The parties stipulated the action would be submitted to binding arbitration.

The arbitrator decided that, despite that Castelo signed the extended release prior to her last day of employment, the release was valid throughout Castelo’s employment. The arbitrator also examined California Civil Code Section 1668, which prohibits a person from releasing future violations of law.  The arbitrator decided that the release did not violate California Civil Code Section 1668. The Arbitrator declined to permit Castelo—who accepted the benefits under the Separation Agreement—to use her mistakenly-premature signing of the second release to leverage Section 1668 as a weapon against Xceed.

Castelo asked the trial court to vacate the arbitration award.  The trial court denied to do so.  Castelo asked the Court of Appeal to further examine whether the release for the final month of Castelo’s employment violated California Civil Code Section 1668. The Court of Appeal noted that “… courts have interpreted Section 1668 as precluding releases of liability only for future violations of law, … [when] the facts giving rise to the offense have not yet occurred.” The Court of Appeal added that the future violations of law that are not allowed to be released are generally unknown future violations of law.

At the time Castelo signed the Separation Agreement and the extension, Xceed had already made the decision to terminate her.  Castelo already knew the facts that would later form the basis for her wrongful termination and age discrimination claims. Castelo testified that by the time she signed the releases, she believed she was being wrongfully terminated and the wrongful termination was based on age discrimination.  Castelo also did not allege any new, independent acts of discrimination after the date she signed the second release.

The only violations of law that cannot be released by an agreement between two parties are unknown future violations of law. The Court of Appeal sided with Xceed and upheld the judgment of the arbitrator and trial court.

Castelo v. Xceed Financial Credit Union, 2023 WL 3515225 (Cal. Ct. Appeal).

Note: The employer was fortunate that the employee did not allege any new discrimination after the date she signed the releases.  Severance agreements that release an employer from future, unknown violations of the law are not valid. 

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