Settlement and Release Agreement: Section 1542 and CCP 664.6

A settlement and release agreement in California is a binding contract that ends a dispute in exchange for agreed consideration, and drafting one that actually holds up means going beyond ordinary contract rules. State law imposes specific requirements around waiving unknown claims, restricting confidentiality, releasing age discrimination claims, allocating taxable amounts, and locking in court enforcement. Miss one of these and you can end up with claims that survive the release, clauses that are void on their face, or a deal you can only enforce by filing a brand-new lawsuit.

Core Terms Every Agreement Needs

Start with the basics. The document has to identify the releasor (the party giving up claims) and the releasee (the party being released), and it has to state the consideration each side is giving or receiving. Usually that’s money in exchange for dropping claims, but it can also be a promise to do or stop doing something specific.

The scope of the release is where precision pays off. Spell out which claims are covered, whether the release is limited to this dispute or reaches more broadly, and whether it binds related parties such as affiliates or successors. Vague language here is what people litigate about later.

Two optional clauses are worth weighing. A prevailing-party attorney fees provision shifts enforcement costs to whichever side loses, which discourages both frivolous breach claims and foot-dragging. A liquidated damages clause sets a fixed penalty for specific breaches, such as violating confidentiality. California courts will enforce liquidated damages only when the amount was a reasonable estimate of probable harm at signing and actual damages would be hard to calculate. A number that looks like punishment rather than compensation will be struck down as an unenforceable penalty.

The Section 1542 Waiver

This is the single most common drafting miss. California Civil Code Section 1542 provides that a general release does not extend to claims the releasing party does not know or suspect at the time of signing, if those claims would have materially affected the settlement had they been known.¹ In other words, “general release” in California isn’t as general as it sounds. If you later discover an injury or loss you didn’t know about, Section 1542 preserves your right to pursue it.

When both sides want a clean break with no lingering exposure, the agreement has to explicitly waive Section 1542. Standard California practice is to quote the statute verbatim and add a statement that the parties have read it, understand it, and voluntarily give up its protection.² Without that waiver, a later-discovered claim can reopen what everyone thought was a final resolution.

What You Can and Cannot Keep Confidential

California puts real limits on what a settlement can hide. These rules catch parties who assume they can simply require blanket silence.

Harassment, Discrimination, and Assault Claims

Code of Civil Procedure Section 1001 voids any settlement provision that prevents or restricts disclosure of factual information about claims involving sexual assault, sexual harassment, workplace harassment or discrimination, and housing discrimination. Courts cannot enter stipulated orders that conflict with the statute either. Two carve-outs matter in practice. At the claimant’s request, the agreement can shield the claimant’s identity and any facts that would reveal it, unless a government agency or public official is a party. And the statute does not bar keeping the settlement dollar amount confidential.³ You can hide the number; you cannot hide the facts.

Employment Separation Agreements

For agreements tied to an employee leaving a job, Government Code Section 12964.5 adds more. Any non-disparagement clause in a separation agreement has to include language substantially stating: “Nothing in this agreement prevents you from discussing or disclosing information about unlawful acts in the workplace, such as harassment or discrimination or any other conduct that you have reason to believe is unlawful.” Without that language, the clause is unenforceable. Employers also have to tell the employee of their right to consult an attorney and give at least five business days to do so before signing.⁴

Section 12964.5 does not apply to a negotiated settlement resolving a claim that has already been filed in court, before an administrative agency, in an alternative dispute resolution forum, or through the employer’s internal complaint process. Those are governed by CCP Section 1001 instead.⁴

The Federal Speak Out Act

Federal law adds another layer for sexual misconduct claims. Effective December 7, 2022, the Speak Out Act renders unenforceable any pre-dispute nondisclosure or non-disparagement clause where the underlying claim involves sexual assault or sexual harassment.⁵ The key word is “pre-dispute.” The Act targets NDAs signed before a dispute exists, such as onboarding agreements, not confidentiality terms negotiated as part of a settlement after the dispute has surfaced. It also carves out protections for trade secrets and proprietary information.

Extra Steps for Age Discrimination Releases

If the release covers claims under the federal Age Discrimination in Employment Act, the Older Workers Benefit Protection Act sets procedural requirements. A waiver that skips any of these is not “knowing and voluntary,” which makes it unenforceable:⁶

The waiver is written in language the individual or the average eligible participant can understand.
It specifically references rights or claims under the ADEA.
It covers only claims that have already arisen as of signing, not future claims.
The employee receives something of value beyond what they were already entitled to.
The agreement advises the employee in writing to consult an attorney.
The employee has at least 21 days to consider the agreement, extended to at least 45 days if the waiver is part of a group layoff or exit incentive program.
The employee has 7 days after signing to revoke, and the agreement does not take effect until that window closes.

One exception: when the waiver settles a charge already filed with the EEOC or a lawsuit already in court, the fixed 21- or 45-day review period is replaced by a “reasonable period of time.” The other requirements still apply.⁶

Allocating the Payment for Tax Purposes

How the money is taxed depends on what it compensates. A lump-sum payment with no allocation invites the IRS to treat the whole thing as taxable. A carefully allocated settlement can save real money.

Federal law excludes from taxable income damages received on account of personal physical injuries or physical sickness, with punitive damages as the exception.⁷ Most other categories are taxable:⁸

Emotional distress not tied to a physical injury is taxable, even when it causes physical symptoms such as insomnia or headaches. Medical expenses actually paid to treat the distress can be excluded.
Lost wages and other economic damages are taxable unless directly attributable to a personal physical injury claim.
Discrimination settlements (age, race, gender, religion, disability) are taxable in full, compensatory and punitive alike.
Punitive damages are always taxable, with a narrow exception for wrongful death claims in states whose law permits only punitive damages.

The drafting move is to specify in the agreement what portion compensates physical injury, what portion covers emotional distress, and what portion is lost wages, rather than leaving it as an undifferentiated sum.

Building In Court Enforcement Under CCP 664.6

A signed settlement is a contract, but a contract does not have the force of a judgment. Code of Civil Procedure Section 664.6 gives you an expedited path: on motion, the court can enter judgment on the settlement terms without a new lawsuit.⁹

To qualify, the parties have to agree to the settlement either in a writing signed outside court or orally on the record before the judge. The writing does not need the parties’ personal signatures in every case. Under Section 664.6(b), a signature from an attorney who represents the party counts, and so does one from an authorized insurance agent when an insurer is defending and indemnifying a party, as long as the settlement doesn’t expose the insured above policy limits.⁹ In civil harassment cases, family law matters, probate, and juvenile or dependency proceedings, the parties themselves must sign.

The step you cannot skip is asking the court to retain jurisdiction to enforce the agreement until performance is complete. Parties or counsel can request it, in writing or orally on the record. Without that request, once the case is dismissed the court loses the ability to enforce through a Section 664.6 motion. Typical practice is dismissal without prejudice, which keeps the court’s enforcement authority alive if someone fails to perform.⁹

If the Other Side Breaches

Your remedies depend on whether Section 664.6 was set up properly.

When the court retained jurisdiction, the non-breaching party files a motion asking the judge to enter judgment on the settlement terms. This is fast, relatively inexpensive, and produces a judgment enforceable like any other.⁹

When jurisdiction was not retained, or the underlying case was dismissed outright, the non-breaching party has to file a new lawsuit for breach of contract, with the settlement agreement itself as the contract. That means the full time and cost of ordinary litigation. The statute of limitations for breach of a written contract is four years from the date the breach occurred.¹⁰

Available remedies are monetary damages or, in limited circumstances, specific performance. Courts order specific performance only when money cannot adequately compensate, which usually means the promised performance involves something unique. A settlement requiring transfer of a specific piece of real property is a stronger candidate than one that involves only a dollar payment.

1
California Legislative Information. California Civil Code 1542 – Release
2
California Legislative Information. California Code CIV 1542 – Release
3
California Legislative Information. California Code of Civil Procedure 1001
4
California Legislative Information. California Government Code 12964.5
5
Office of the Law Revision Counsel. 42 USC Ch. 164 – Speak Out Act
6
Office of the Law Revision Counsel. 29 U.S. Code 626 – Recordkeeping, Investigation, and Enforcement
7
Office of the Law Revision Counsel. 26 USC 104 – Compensation for Injuries or Sickness
8
Internal Revenue Service. Tax Implications of Settlements and Judgments
9
California Legislative Information. California Code of Civil Procedure 664.6
10
California Legislative Information. California Code of Civil Procedure 337