Settlement Agreements: The Essential Terms

Settlement Agreements: The Essential Terms

From a Plaintiff’s Perspective

by Jody LeWitter

The Labor & Employment Section of the State Bar of California

October 31, 1998

10:45 a.m.

Claremont Resort

1. Who Drafts the Release
   1. Employers seem to believe that they have a God-given right to draft the release; it isn’t usually worth fighting over, but plaintiff’s counsel should carefully review and negotiate the terms of the release.
   2. Mediators or settlement judges can assist in drafting the release or resolving disputes about it.
      1. Most mediators limit their involvement to a “preliminary release” subject to the drafting of a final agreement by the parties.
      2. It is much more helpful, but unusual, if a full and final agreement can be signed at a mediation, or put on the record at a settlement conference.
   3. You should attend a mediation or settlement conference with a draft or form settlement agreement.
   4. If there is a preliminary agreement, one of the essential terms of the preliminary agreement should be the date by which a draft of the release will be provided (if the defendant is drafting it) and the date for payment.
2. General Negotiation Tenor
   1. Your ability to negotiate fair terms and conditions of a settlement agreement is largely dependent upon your general negotiating position.
      1. If you have a strong claim, your negotiating position should be strong,and you should be able to hold out for a balanced agreement.
      2. Even if you do not have a strong claim, but have reached a sensible monetary resolution, you still should have the authority to negotiate a fair release, as it is usually in everyone’s interest to finalize the settlement at that point.
3. The Devil Is in the Detail
   1. Much of negotiating a fair settlement agreement is patience and attention to detail.
   2. Don’t assume your work is over just because you have reached an “agreement,” you must still negotiate the terms of the agreement.
   3. If you reach an impasse on a term of the release, it is important to try to understand what goal the defense counsel/defendant is trying to achieve.
      1. Explain your goals, and you may more likely work out a creative resolution.
   4. In general, simple, plain English wins over compound, convoluted legalese.
4. The First Essential Term: Date for Payment
   1. Of course, the sooner payment is made the better.
   2. Payment terms of between one week and one month are common.
   3. Avoid common misunderstandings by understanding what event triggers the time period for payment.
      1. Is it one week from plaintiff’s signature or one week from defendant’s receipt of the release?
      2. The only way to ensure payment on time is to include penalties, interest, or other incentives to ensure timely payment.
5. The Second Essential Term: Payment Terms
   1. Clearly and simply, the release must provide what, when and how.
   2. Who is the check made out to?
      1. Checks can be made out to the client, the attorney or both.
      2. Where warranted, separate checks made to client and counsel (for fees and costs) at least make it clearer that the client will not be paying taxes on the amount paid to counsel.
      3. A defendant may agree to issue a separate check to counsel, especially where there is an attorneys fees claim (such as discrimination claims under the California Fair Employment and Housing Act, Title VII, the ADEA or the ADA).
   3. Structured Settlements
      1. Structured settlements are generally payments made over a specified period of time.
      2. Circumstances which may warrant a structured settlement:
         1. When there is a substantial amount of money at issue;
         2. When a defendant can’t afford to make the payment all at once;
         3. More recently, with the changes in tax laws, when there is a tax advantage to receiving the money in multiple years.
      3. Payments can be made by the defendant or a third party who holds an annuity purchased by the defendant.
         1. The payments are only as good as those obligated to pay.
         2. Annuities should only be purchased from a well reputed company.
         3. Due to potential negative tax consequences, the terms of any annuity should be set forth in detail in the settlement agreement, rather than later on. Once the plaintiff has the right to the money, it becomes taxable.
      4. Make sure a provision provides for continued payment in the case of a plaintiff’s death.
      5. An accountant can tell your client the value of the structured settlement in present value.
      6. A client should always be advised of the risks of payment over time, such as the risk of insolvency of the payor.
6. The Third Essential Term: Injunctive Terms of a Release
   1. Re-Employment
      1. The release should at least set forth the position, the job duties, the pay, location, that the employee will be supervised by specified supervisors (if that is a term and condition) and whatever terms and conditions of re-employment can be agreed upon such as “termination subject to the employment manual” or “will have the same rights and obligations as all other employees…”
      2. Should include a “no retaliation” provision.
      3. It is best to specify what effect the re-employment will have upon the employee’s pension plan, vacation, health insurance eligibility and other benefits.
   2. Future Training and Promulgation of Policies & Procedures
      1. In some cases, part of the agreement is to train the workforce, certain segments of the workforce or certain individuals in, for example, sexual harassment and/or equal opportunity laws and procedures.
      2. The type of training should be specified, and, if possible, the trainer, length of training and other details.
      3. If there are to be new policies and procedures, the more detailed the better, and a provision for distribution is recommended.
   3. Expungement of Records
      1. Disputed records, such as performance reviews or termination letters, can be purged from the employer’s file, or kept in a separate, confidential (i.e., sealed) location.
         1. Be aware that there are situations in which sealed documents may be discovered.
         2. Even if the documents are destroyed, employer witnesses can still provide verbal feedback or testimony that may hurt your client. For expungement of records to be effective, it must be accompanied by an agreement regarding what may be said about an employee.
      2. Agreement Regarding References
         1. Often a verbatim, agreed upon reference letter is attached to the release.
         2. Agreement can also restrict the persons who can provide references.
         3. An agreement that no reference be given except name, rank and serial number may suffice depending upon the circumstances (i.e., such as name, position held, dates held, departing salary, that the termination was voluntary and/or no further information can be provided pursuant to company policy).
         4. Finding balance in Agreements regarding References:
            1. If only limited information is provided, future employers may be suspicious.
            2. If too much leeway is given, the employer may say something your client wishes wasn’t said.
      3. Stipulated or Retroactive Resignations
         1. If an employee was fired, the firing can be reversed, the employee re-employed, and allowed an opportunity to resign, so that employee may state in his or her job search that her resignation was voluntary.
7. The Fourth Essential Term: Tax Implications of the Settlement
   1. Tax issues are one of the most important aspects of a release, and one of the most confusing for labor and employment lawyers.
   2. Do the Right Thing: Consult with a Tax Expert
      1. It is important to tell a client that you are not a tax expert (assuming you aren’t).
      2. Either the client or you should consult with a tax expert.
   3. Are Employment Settlements Taxable?
      1. The (over) generalization: moneys being paid out on wrongful termination and discrimination claims are taxable.
      2. According to the tax code, recovery is only non-taxable if (1) received from the prosecution or settlement of an action based upon tort or tort-type rights, and (2) received on account of “personal injuries or sickness.” IRC § 104(a), Commissioner v. Schleier, 515 U.S. 2159 (1995).
      3. Prior to legislation passed in 1996, there was a colorable argument that emotional distress damages were not taxable. This is not true today, as “personal injuries” are strictly construed, and cannot include common problems such as headaches, stomachaches, and loss of sleep. It might include injuries due to a physical battery, for example. See IRC § 104(a); Commissioner v. Schleier.
      4. Some accountants believe that certain expenses, such as medical expenses or job search costs, may not be taxable.
   4. What Should the Release Say Regarding Taxes?
      1. The agreement should set forth what money is being paid for, i.e., the type of damages, as well as the claims it is being paid on.
      2. If some damages are taxable and some are not, the settlement agreement should set out, in as much detail as possible, the proportions and rationale.
      3. If possible, have the employer agree with and endorse your position on whether, and what portion of, the money is taxable. This will be helpful if your client is audited. Most employers will simply say the plaintiff is responsible for taxes, if any.
      4. The release should probably specify whether a W-2 or 1099 tax form will be issued (see § E).
   5. Taxes Shoul d Not Generally Be Withheld by the Employer
      1. Payments for economic losses and emotional distress damages, in general, can fairly be paid on a 1099, as they are not wage losses. Lisec v. United Airlines (1992) 10 Cal.App. 4th 1500. Here the advantage is no money is withheld by the employer. The employee must pay the amounts due directly to the IRS. The employer issues a 1099.
      2. The other option is to use a W-2. With a W-2, the employer takes out the payroll taxes, just like it is a wage payment, and pays into social security and makes all other appropriate payments. The employer does the withholding. The advantage is that, for example, you pay more into social security. This isn’t required by law, but occasionally some employees prefer it. A number of employers erroneously take the position that this is required. If done, it should only be done for lost “wages.”
   6. Payments made under the workers Compensation Act are not taxable, so, where appropriate, and with the required proper procedures, some damages that are covered under the Act can be nontaxable.
   7. It may have some tax advantage (or at least simplify accounting problems) to have the settlement agreement provide that separate checks to be made payable to the employee and his/her counsel where appropriate.
8. The Fifth Essential Term: Enforceability of the Settlement Agreement
   1. No Enforcement Mechanism
      1. Enforcement is difficult without an explicit mechanism and payment of attorneys fees and costs if enforcement is necessary.
      2. If there is no particular enforcement mechanism, you must either file a separate suit for breach of contract and/or get the court in which the case was filed to enforce the settlement.
   2. Alternative Enforcement Mechanisms
      1. The parties may agree to alternative enforcement mechanisms such as through a particular arbitrator or mediator or an organization such as American Arbitration Association (AAA) or Judicial Arbitrations and Mediations (JAMS).
      2. Some enforcement provisions include attorneys fees and costs for the prevailing party in the enforcement proceedings. It is important to know the parties involved, and issues likely to come up, to evaluate whether this is beneficial to your client.
      3. Part of the enforcement agreement can be a Stipulated Judgment, signed by the defendant, which plaintiff is authorized to enter if, for example, two payments are late, or payments are more than ten days late.
   3. What is good for the goose is good for the gander.
      1. Reject one-way enforcement agreements that only provide for mechanisms to enforce the provisions the defendant cares about.
9. The First Thing the Defendant Will Want: Confidentiality
   1. Historical Growth of Confidential Settlement Agreements
      1. It is only recently, perhaps as recently as the 1980s, that confidentiality became a commonly negotiated term in a settlement agreement.
   2. In Whose Interest Is Confidentiality?
      1. Defendants claim it is necessary so that others do not learn how much they paid someone else, so it doesn’t set a “trend” or encourage other litigations.
      2. A plaintiff may want confidentiality if she believes that discussion of the litigation, lawsuit, or terms of its settlement may negatively impact her career.
         1. This is especially true in some small industries or professions where news travels fast.
      3. In general, confidentiality is of no interest to a plaintiff and should be grumbled at or about, as it tends to hide from public scrutiny and discourse societal and corporate problems and issues.
   3. Be Careful About “What” You are Agreeing to Keep Confidential
      1. Confidentiality of the amount of payment is the most commonly requested area.
      2. Confidentiality of the terms of the settlement agreement is the second most commonly requested area.
      3. “Kitchen Sink” Confidentiality, i.e., confidentiality of everything and anything is also sometimes requested and should be spurned as unworkable and unacceptable
         1. A plaintiff needs to be able to talk about his work experiences: don’t tie his hands in this area.
         2. A plaintiff often needs to explain to prospective employers what really happened.
         3. A plaintiff may not want to sweep illegal or immoral actions by her employer under the rug.
   4. Make sure the Confidentiality Agreement is Realistic for Your Client and Her Claims
      1. Look at who else could spill the beans, and is your client responsible for this.
      2. Look realistically at your client’s ability and desire to keep things confidential.
10. The Second Thing the Defendant Will Want: Waiver of All Claims
    1. Waiver of the claims set forth in any lawsuit or charge of discrimination is standard fare.
    2. A Waiver of the Unknown Future Claims
       1. Usually standard fare, but look out for things that should not be waived, especially if there is an ongoing relationship.
       2. Civil Code § 1542 states that “A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor.” Defendants routinely ask plaintiffs to waive this right, making the exception swallow the rule.
          • It is better to explicitly state that this does not waive claims that may arise in the future, although this is implied by § 1542, which refers to “at the time of executing the release.”
    3. Is the Waiver Mutual?
       1. If the employer is asking your client to waive all claims against the employer, known and unknown, don’t you want the same?
       2. Do you want to include malicious prosecution claims? Is it legal to do so?
       3. Are there other claims you may be concerned that the employer may bring against your client in the future, such as claims for libel or theft?
          1. Whether such claims have merit or not, waiver may provide a sense of relief to the plaintiff.
          2. Sometimes there are potential claims that a plaintiff should reimburse the employer for medical or other expenses, which should be waived.
    4. Waiver of Workers Compensation Acts
       1. Releases should not waive workers compensation remedies.
       2. Only waive workers compensation remedies if you are educated about what you are giving up.
       3. Consult a workers compensation attorney.
       4. Even if you waive these remedies, the waiver is not valid unless approved by the Workers Compensation Appeals Board. Labor Code § 5001, et seq.
    5. Wage Claims
       1. Cannot require waiver of wage claims unless the payment for such has been made. Labor Code § 206.5
    6. The Third Thing Defendants Want: Liquidated Damages
       1. Liquidated damages assign a somewhat arbitrary value to breaches of any agreement, thus obviating the need to prove actual damage from the breach.
       2. In theory, liquidated damages must not be punitive damages, but instead must be related in some fashion to the anticipated harm.
       3. Liquidated Damages for Breach of Confidentiality
          1. Employers often seek liquidated damages for any anticipated breach of a confidentiality agreement.
          2. Since actual damages from the breach are often nil, be wary of liquidated damages.
       4. The Amount
          1. If liquidated damages are agreed to, make sure they are in proportion to the harm as well as the amount of a settlement agreement. For example, 5% or 10% of the value of the settlement may be an appropriate proportion.
       5. Even if you agree to liquidated damages, take heart that neither judges nor arbitrators like them, and if permitted by the law, will not enforce them.
    7. The Fourth Thing a Defendant Will Want: Waiver of the Right to Apply for Re-Employment
       1. Some employers want the plaintiff to waive this right, including applications for re-employment with subsidiaries and related corporation.
       2. Examine both whether re-employment is something your client could conceivably want in the future and whether it is realistic to return to this workplace.
          1. Size of the workplace, and whether there are opportunities for the employee to work for a different supervisor, in a different department, or at a different location, are important factors.
          2. What the employee is giving up, in terms of whether this is an important employer in the industry in which the employee works, is also important.
    8. The Fifth Thing a Defendant Will Want: Characterizing the Claim as “Dispute” or Worse
       1. Employers almost always want to characterize the claim in their favor: as frivolous, meritless, unproven, unfounded, or B at best B disputed.
       2. That the claim is disputed is usually the essence of most settlement agreements.
       3. Other derogatory characterizations, i.e., frivolous or meritless, should be avoided.
    9. The Sixth Thing a Defendant Will Want: Each Side to Bear Its Own Costs and Attorneys Fees
       1. Unless indicated otherwise in the agreement, for example, by a separate payment of fees and costs to the plaintiff’s counsel, this is usually routine.
       2. If so, with a fee compensable claim, remember that the attorneys fees will come out of the settlement.
          1. Before agreeing to any settlement, make sure the plaintiff understands how much of the settlement will be fees and costs, and how much will actually land in their pocket.
             1. Don’t forget to mention that there also will be taxes to pay.
       3. Sometimes there will be a specific allocation, such as defendant to pay mediator’s fees.
    10. Does the Agreement Require Any Other Unexpected Actions by Your Client?
        1. Examples: prohibition of cooperation in other litigation, cooperation in defending other litigation, etc.?
        2. Does it require or prohibit the attorney from taking any action?
    11. Who Must Sign a Settlement Agreement?
        1. The parties should sign a settlement agreement.
        2. Attorneys often approve “as to form only” to indicate that the parties have had an opportunity to consult counsel.