Checklist · Litigation

Drafting and Closing a Settlement Agreement: A Practical Checklist

26 U.S.C. § 104(a)(2)

Type: Checklist
Jurisdiction: National
Date: 2026-01-24
Topic: Litigation

A step-by-step operational checklist for taking a settlement from the moment of handshake through payment, dismissal, and closing. Eleven phases cover pre-negotiation preparation including lien and tax analysis that must happen before a number is agreed, confirming settlement authority, capturing the deal in a term sheet that is deliberately binding or deliberately not, drafting the release with attention to who releases whom and to unknown claims, handling the claims that cannot be released in the ordinary way, drafting confidentiality and non-disparagement that survive current labor and state law, allocating and reporting the money, resolving liens through escrow before disbursement, building the enforcement architecture into the dismissal order, executing and closing, and post-closing obligations including the tax forms and the calendar of continuing duties. Each phase carries commentary on why the step matters and the traps that reopen settled cases. A worked example follows an employment settlement with a wage component and a Medicare lien.

Drafting and Closing a Settlement Agreement: A Practical Checklist

Litigation > Settlement | Published 24 January 2026 - Updated 29 July 2026 | UpLaw - uplaw.us

In brief. All the leverage exists at the moment of agreement and none of it exists afterward. Everything on this list that can be decided in the room should be decided in the room — especially the eight terms that actually break settlements: released parties, unknown claims, unreleasable claims, allocation, reporting, liens, security, and retention of jurisdiction.

Keywords: authority, binding term sheet, released parties, § 1542, OWBPA, FLSA approval, savings clause, § 7 carve-out, allocation, W-2/1099, escrow, retention of jurisdiction, closing binder

How to use this. Phases 1–3 happen before and at the negotiation. Phases 4–9 are the document. Phases 10–11 are closing and after. The doctrine is in Settling a Civil Case: A Comprehensive Guide to Negotiation, Releases, and Enforcement. The narrative account of the failure modes is in The Release You Signed.

A standing caution. Formation formalities, mediation confidentiality, release construction, contribution rules, and confidentiality restrictions are all state law and vary substantially. Confirm the governing jurisdiction's rules, and in a multi-state matter confirm each.

Phase 1 — Before You Negotiate a Number

[ ] Build the decision tree: probability-weighted outcomes, discounted for time and cost to try.
[ ] Compute the cost to try honestly, including internal disruption.
[ ] Identify the client's non-monetary interests — reference, reinstatement, benefits continuation, policy change, public statement — which frequently cost the other side little.
[ ] Identify every claim in the case and which are unreleasable in the ordinary way (Phase 6).
[ ] Identify all lienholders now: Medicare, Medicaid, ERISA plan, workers' compensation carrier, hospital and provider liens, child support, prior counsel, judgment creditors.
[ ] Request the Medicare conditional payment letter — this takes weeks and is the most common cause of delayed closing.
[ ] Run the tax analysis: what is excludable under 26 U.S.C. § 104(a)(2), what is wages, and whether the § 62(a)(20) above-the-line fee deduction is available.
[ ] Compute the client's net after taxes, fees, costs, and liens — the only number that matters to the client.
[ ] Confirm any insurer consent requirement and the insurer's position.
[ ] Confirm any board, committee, or government approval required to bind.

Why it matters, and the traps. Negotiating a gross number without knowing the liens and the tax treatment is how a plaintiff agrees to $185,000 and receives $41,000. That conversation, held after the handshake, is a client relations disaster and a frequent malpractice complaint. Do the arithmetic first and negotiate to the net. On the defense side, the equivalent error is agreeing to a number without knowing whether the wage portion carries employer-side payroll taxes on top of it.

Phase 2 — Authority

[ ] Obtain express client authority to settle at a stated number and on stated terms — apparent authority is not enough in most jurisdictions.
[ ] Document the authority in writing before the mediation.
[ ] For an entity, confirm who holds authority and at what level; bring that person or ensure they are reachable.
[ ] Confirm the insurer's consent authority and whether a consent-to-settle or hammer clause applies.
[ ] For multiple clients, comply with Model Rule 1.8(g) on aggregate settlements: disclose the existence and nature of all claims, the participation of each person, and obtain informed consent in a signed writing from each.
[ ] Confirm no proposed term would restrict the lawyer's right to practice, which Rule 5.6(b) prohibits.
[ ] Communicate every offer to the client. Model Rule 1.4(a)(1).
[ ] Confirm the decision to settle is the client's. Model Rule 1.2(a).

Why it matters, and the traps. A settlement made without authority is voidable, and the lawyer who made it has a serious problem with both the client and the opposing party. The aggregate settlement rule is the one most often violated in practice — mass claim resolutions routinely allocate among clients without the disclosure and individual consent the rule requires, and the consequence is fee forfeiture and discipline, not merely an unenforceable settlement.

Phase 3 — Capturing the Deal

[ ] Decide whether the term sheet is binding, and say so expressly either way.
[ ] Capture all material terms: amount, timing, parties released and releasing, scope of release, dismissal and prejudice, confidentiality.
[ ] Add the terms that break settlements, while everyone is still in the room: unknown claims waiver, allocation, court approval if required, lien escrow, savings clauses, and retention of jurisdiction.
[ ] Confirm whether the jurisdiction's mediation privilege would make the term sheet inadmissible in an enforcement action — and if so, take the settlement outside the mediation, recite it on the record, or expressly waive mediation confidentiality for enforcement.
[ ] Have all parties sign, not just counsel, where feasible.
[ ] Set a deadline for the long-form agreement and state what happens if it is missed.
[ ] Notify the court of settlement and request an appropriate stay of deadlines.

Why it matters, and the traps. The disaster is a term sheet that is silent on whether it binds — it gets litigated at exactly the moment both parties believed they were finished. The subtler trap is the mediation privilege: in a state with no enforcement exception, a mediator's memorandum reciting the settlement may be inadmissible in a suit to enforce it, which means the parties have a binding agreement they cannot prove. Take it outside the mediation.

Phase 4 — The Release

[ ] List released parties expansively: entity, parents, subsidiaries, affiliates, divisions, predecessors, successors, assigns, insurers, and their officers, directors, members, partners, employees, agents, and attorneys, in individual and representative capacities.
[ ] List releasing parties: the plaintiff, heirs, executors, administrators, successors, assigns, anyone claiming through them, and controlled entities.
[ ] Address derivative claims — spousal consortium, community property interests.
[ ] Choose the scope: claims asserted; claims arising from the facts alleged; or all claims known and unknown.
[ ] Include the unknown claims waiver with an express reference to the applicable statute (California Civil Code § 1542 or its analogue) and an acknowledgment of possible later-discovered facts.
[ ] Add a covenant not to sue where a release would unintentionally discharge joint tortfeasors.
[ ] State any reservations — claims expressly not released.
[ ] Obtain representations: the releasor owns the claims, has not assigned them, and has disclosed all lienholders.
[ ] Obtain an indemnity against liens and subrogated claims.
[ ] Confirm the release's effective date and that it does not purport to release future claims.
[ ] Confirm no bankruptcy petition is pending and assess preference exposure if the payer is distressed.

Why it matters, and the traps. A release naming only the corporate defendant leaves every individual manager suable the following month, which is the single most common scope error. The second is omitting the unknown claims waiver: in § 1542 jurisdictions a general release simply does not reach claims the releasor did not know about, so the payer bought materially less than it thought. Both fixes are one paragraph each.

Phase 5 — Terms Beyond the Release

[ ] Payment: amount, timing, method, payees, and separate checks to client and counsel.
[ ] Default and acceleration, with an attorney's fee provision for enforcement.
[ ] Security where payment is deferred: escrow, letter of credit, guarantee, or consent judgment held pending performance.
[ ] No admission of liability; no precedential effect.
[ ] Return or destruction of documents, with written confirmation.
[ ] Cooperation obligations and compensation for time.
[ ] References and neutral employment verification, with a named contact and agreed script.
[ ] No rehire, where lawful.
[ ] Benefits: COBRA treatment, equity vesting, deferred compensation, and 401(k) treatment.
[ ] Standard clauses: entire agreement, written amendment, severability, counterparts and electronic signature, notices, governing law, forum, and jury waiver.
[ ] Survival of representations and indemnities.

Why it matters, and the traps. Deferred payment without security is an unsecured loan to a party that just demonstrated it would rather litigate than pay. If the money is not paid at closing, take security — and if the payer will not give any, price that risk into the number rather than ignoring it.

Phase 6 — Claims Requiring Special Treatment

[ ] ADEA: satisfy every OWBPA element — plain language; specific ADEA reference; no waiver of future rights; consideration beyond existing entitlement; written advice to consult counsel; 21 days to consider (45 for a group program); 7-day revocation; agreement not effective until revocation expires; group disclosures of decisional unit, eligibility factors, job titles and ages.
[ ] FLSA / state wage claims: obtain court approval or DOL supervision; prepare for public filing; consider whether the client will accept publicity.
[ ] Savings clause preserving the right to file a charge with and participate in investigations by the EEOC, NLRB, OSHA, DOL, SEC, or any agency — without notice to the employer — while waiving monetary recovery to the extent permitted.
[ ] SEC Rule 21F-17 carve-out: no impediment to communicating with the Commission and no waiver of a whistleblower award.
[ ] Workers' compensation: agency approval where required.
[ ] Minor or incapacitated party: guardian ad litem, court approval, and a blocked account or structure.
[ ] Qui tam: government consent to dismissal.
[ ] Confirm no term purports to waive unemployment benefits or future claims.

Why it matters, and the traps. A defective OWBPA waiver is void as to the ADEA claim, and the employee generally need not return the money before suing — the employer paid and got nothing. The commonest defects are trivial and fatal: 21 days offered but the employee signed on day 3 without the agreement noting the waiver was knowing and voluntary; a revocation period stated but the agreement made effective on signature; or additional consideration that turns out to be something the employee was already owed.

Phase 7 — Confidentiality and Non-Disparagement

[ ] Limit confidentiality to the amount and terms, not the underlying facts or the employee's experience.
[ ] Limit non-disparagement to maliciously false statements.
[ ] Include an express § 7 savings clause (McLaren Macomb).
[ ] Make the obligations mutual.
[ ] Check state restrictions on confidentiality in harassment and discrimination settlements — several prohibit it as to the underlying facts or permit it only at the claimant's election.
[ ] Confirm the Speak Out Act does not apply (it reaches pre-dispute clauses) and that any post-dispute clause complies with state law.
[ ] Price 26 U.S.C. § 162(q) — no deduction for a harassment-related settlement subject to an NDA, including related fees.
[ ] Carve out: government agencies; compelled testimony; attorneys, accountants, and tax advisers; immediate family; enforcement of the agreement; and § 7 activity.
[ ] If including liquidated damages, make the amount a reasonable estimate of harm, not a penalty, and not forfeiture of the entire payment.

Why it matters, and the traps. Under McLaren Macomb, merely offering an overbroad provision violates the Act — the employee need not sign it. Employers using pre-2023 severance templates are committing an unfair labor practice with every offer, and most have not updated. The tax trap is separate and under-appreciated: § 162(q) is drafted broadly enough that it may deny the plaintiff's fee deduction too.

Phase 8 — Money, Allocation, and Reporting

[ ] State the allocation among claim types, consistent with the pleadings and defensible on audit.
[ ] Identify the wage component: W-2, withholding, and employer-side FICA and FUTA — and state who bears them.
[ ] Identify non-wage components: Form 1099-MISC.
[ ] Identify attorney's fees: Form 1099-NEC to counsel, and note the Banks inclusion in the plaintiff's income.
[ ] Confirm whether the § 62(a)(20) above-the-line deduction is available for this claim type.
[ ] Collect W-9s from the plaintiff and counsel at signing.
[ ] Specify separate checks to plaintiff and counsel.
[ ] State that each party has consulted its own tax adviser and that no party has given tax advice to another.
[ ] Advise the client in writing of the expected tax treatment and net recovery.
[ ] For a structure: establish it before constructive receipt, with a qualified assignment under 26 U.S.C. § 130.

Why it matters, and the traps. An agreement silent on allocation invites the IRS to allocate for you, usually unfavorably. The bigger trap is Banks combined with a claim type outside § 62(a)(20): the plaintiff can be taxed on the gross recovery including the fee, with no deduction — producing a tax bill that exceeds the net proceeds. That has to be modeled before the number is agreed, not explained afterward.

Phase 9 — Liens and Escrow

[ ] Obtain the Medicare conditional payment letter; dispute unrelated charges; obtain the final demand.
[ ] Assess whether a Medicare Set-Aside is required for future medicals.
[ ] Confirm the insurer or self-insured will complete Section 111 reporting.
[ ] Obtain Medicaid payoff; apply Ahlborn and Gallardo to the allocation.
[ ] Obtain the ERISA plan documents and lien assertion; analyze under McCutchen (plan terms control) and Montanile (no recovery from dissipated general assets).
[ ] Obtain hospital and provider lien payoffs; check statutory perfection requirements, which are frequently defective.
[ ] Obtain workers' compensation carrier subrogation and future credit position.
[ ] Check child support arrears, which attach automatically in many states.
[ ] Resolve prior counsel's charging lien.
[ ] Negotiate reductions — many statutes and doctrines require lienholders to bear a proportionate share of fees and costs.
[ ] Escrow the disputed amount; do not disburse to the client until written releases are in hand.
[ ] Obtain written lien releases and retain them.

Why it matters, and the traps. Medicare's remedy runs directly against the attorney as well as the client, with double damages, so disbursing before resolution puts the lawyer's own money at risk. The recurring practical failure is treating lien resolution as post-closing work: conditional payment letters take weeks, final demands take longer, and a settlement that promised payment in 30 days cannot accommodate that unless funds are escrowed.

Phase 10 — Enforcement Architecture and Dismissal

[ ] Include in the dismissal order: "The Court shall retain jurisdiction to enforce the terms of the parties' settlement agreement."
[ ] Or incorporate the settlement terms into the order — recognizing that this makes them public.
[ ] Consider a consent judgment entered and stayed pending performance.
[ ] Confirm the dismissal is with prejudice and that each party's costs and fees are addressed.
[ ] Confirm security is in place for any deferred obligation.
[ ] Confirm the attorney's fee provision covers enforcement.
[ ] Confirm governing law and forum for enforcement.
[ ] File the dismissal only after payment or after security is in place — not before.
[ ] Vacate or address any pending motions, trial dates, and subpoenas.
[ ] Confirm any court approval required has been obtained before dismissal.

Why it matters, and the traps. Kokkonen v. Guardian Life Insurance Co. of America, 511 U.S. 375 (1994), is the whole reason this phase exists: without retention of jurisdiction or incorporation, a federal court cannot enforce a settlement it approved the dismissal of, and the plaintiff's remedy is a brand-new lawsuit. The related trap is filing the dismissal before payment. Once the case is dismissed and the release is effective, the plaintiff's leverage is gone and their only asset is a contract claim.

Phase 11 — Execution, Closing, and After

[ ] Circulate execution copies; confirm signature authority for each entity.
[ ] Observe any revocation period (OWBPA) — the agreement is not effective until it expires and no payment should be made before then.
[ ] Confirm conditions precedent are satisfied: approvals, consents, lien resolution.
[ ] Fund the settlement; confirm receipt.
[ ] Verify wire instructions by telephone using an independently obtained number — settlement funds are heavily targeted by payment fraud.
[ ] Disburse from trust only after lien releases are in hand; provide the client a written settlement statement showing gross, fees, costs, liens, and net.
[ ] File the dismissal with the agreed retention language.
[ ] Issue and retain tax forms; calendar January reporting.
[ ] Calendar continuing obligations: installment dates, cooperation, references, document destruction confirmations, and any reporting.
[ ] Assemble the closing binder: term sheet, executed agreement, all exhibits, lien releases, W-9s, dismissal order, proof of payment, and the settlement statement.
[ ] Send a closing letter to the client confirming the matter is concluded and identifying any continuing obligations.
[ ] Close the file per the retention policy.

Why it matters, and the traps. The OWBPA revocation period is routinely mishandled: payment issued on signature, before the 7 days run, which undercuts the argument that the waiver was effective. The wire fraud point is not theoretical — settlement disbursements are among the most-targeted transactions in legal practice, and the only reliable control is verbal verification against a number obtained independently of the email requesting payment.

Worked Example

Ardith Vance (fictional) settles her discrimination and overtime claims against Northbridge Logistics (fictional) at mediation for $185,000.

Phase 1. Before the mediation, counsel obtains a Medicare conditional payment letter showing $14,200 in payments, of which $5,800 relate to treatment predating the claim and are disputed. Counsel models the tax: back pay is wages; emotional distress is taxable; the fee is deductible above the line under § 62(a)(20) because this is an unlawful discrimination claim. The client is told her expected net before the number is negotiated.

Phase 3. The term sheet, signed at 11:40 p.m. by both parties and both counsel, states that it is binding; identifies released parties as Northbridge and its affiliates, officers, directors, and employees; recites a § 1542 waiver; allocates $60,000 to wages, $65,000 to non-wage damages, $60,000 to fees; states that the FLSA portion is subject to court approval; provides that $20,000 will be escrowed pending lien resolution; recites confidentiality limited to amount and terms with a § 7 savings clause; and provides that the parties will submit a dismissal order in which the court retains jurisdiction.

Because the state's mediation privilege has no enforcement exception, counsel adds a sentence expressly waiving mediation confidentiality for purposes of enforcing the agreement.

Phase 6. The FLSA component is submitted for court approval with a Lynn's Food Stores fairness showing. Northbridge is told, in advance, that this makes the wage terms public. It agrees rather than restructure the deal.

Phase 7. Northbridge's template non-disparagement clause — barring "any statement that reflects negatively on the Company" — is rewritten to reach only maliciously false statements, with a § 7 savings clause. Counsel explains McLaren Macomb; Northbridge's employment counsel updates the firm's template for all future severance agreements, which is worth more than this settlement.

Phase 9. Medicare's final demand comes back at $8,400 after the unrelated charges are disputed and a proportionate fee reduction is applied. An ERISA plan asserts $11,000; the plan document contains clear reimbursement language, so under McCutchen the common fund doctrine does not reduce it, but the plan accepts $8,000 to avoid the cost of pursuit. Both are paid from escrow and written releases are obtained before any disbursement to Ardith.

Phase 10. The dismissal order retains jurisdiction. Payment is made before it is filed.

Phase 11. W-2 for the wage portion with withholding, 1099-MISC for the non-wage portion, 1099-NEC to counsel. Ardith receives a written settlement statement showing every deduction, and a closing letter.

What made it work: pricing the liens and taxes before negotiating, writing eight terms into the term sheet at 11:40 p.m. instead of six weeks later, waiving mediation confidentiality for enforcement, and escrowing the lien amount instead of promising to sort it out afterward.

Drafting and Closing a Settlement Agreement: A Practical Checklist

Phase 1 — Before You Negotiate a Number

Phase 2 — Authority

Phase 3 — Capturing the Deal

Phase 4 — The Release

Phase 5 — Terms Beyond the Release

Phase 6 — Claims Requiring Special Treatment

Phase 7 — Confidentiality and Non-Disparagement

Phase 8 — Money, Allocation, and Reporting

Phase 9 — Liens and Escrow

Phase 10 — Enforcement Architecture and Dismissal

Phase 11 — Execution, Closing, and After

Worked Example

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