Financial terms of the contract were not disclosed.
Hester, who will turn 32 in November, is arguably the greatest return man in NFL history. He has a record 18 career kick and punt returns for touchdowns.
Although he was strictly a kick returner last season, a source said the Falcons plan to use him in "creative ways" in 2014. He played both receiver and defensive back with the Chicago Bears, the team that drafted him in the second round out of Miami in 2006. Hester did not play receiver for the Bears last season.
In 2013, Hester averaged 27.6 yards per kick return and 14.2 yards per punt return with one touchdown. The Falcons averaged 24.4 yards per kick return and 8.3 yards on punt returns.
Hester becomes the fifth free agent to join the Falcons from another team, joining defensive tackle Paul Soliai (Dolphins), defensive end Tyson Jackson and guard Jon Asamoah (Chiefs) and defensive back/returner Javier Arenas (Cardinals).
A three-time Pro Bowler, Hester last season became one of five players to gain at least 3,000 yards on punt returns and 5,000 yards on kick returns.
Hester broke an 81-yard punt return for a touchdown in Week 7 last season at Washington to tie Hall of Famer Deion Sanders for the most career return touchdowns in NFL history. Hester has played in 123 games, and Sanders played in 188.
ESPN.com Bears reporter Michael C. Wright contributed to this report.