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Do's and Don'ts of Employment Settlement Cases

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Do's and Don'ts of Employment Settlement Cases

This presentation will cover do’s and don’t’s for settlement of individual employment cases. While some tax issues will be covered, the audience should understand that Mr. Fitzpatrick is not a tax lawyer and will not be providing tax advice. Among the issues covered will be no rehire clauses; non-disparagement clauses; scope of release; confidentiality; term sheets; ethical issues; effective date; and many others. The purpose of this presentation is to identify the controversial clauses so that the audience appreciate the debate that often focuses on these clauses.

Transcript

- Hi out there, I'm Bob Fitzpatrick and today I'm gonna talk to you about Settlement of Employment Cases. And let me, just before we get started, relate to you a couple of housekeeping matters. First, if you want submit any questions to me I'm happy to try to answer them. Please submit your questions only by email. Don't try to telephone me, please. Thank you. My email address is [email protected] Don't forget that B or it will not get to me. So that's first. Second, a disclaimer of any liability. If I say something that is wrong, stupid, I'm human. Like all humans, I make mistakes and if I say something during this chat that is incorrect, bum advice, whatever, and you rely upon it, you rely upon it exclusively to your detriment. I have no responsibility whatsoever. Lastly, if you wanna know who I am, any of the particulars about me, just go online and there are plenty of bios of Robert B. Fitzpatrick. Okay, I've been doing this forever, over five decades, and in the course of practice and you continue to practice, I love what I do in employment law, understand that I have settled literally hundreds if indeed not thousands of employment cases, as you probably well know. I think it's like 97% of cases settled. Very, very few go to trial and that is, I think, largely because us lawyers have finally woken up to the notion that our clients embrace, and that is, they know what litigation is like. It is tedious, it is typically unpredictable, and can be very, very expensive. And at the end of many, many years of litigation your client could lose. Hence, most sane clients want to settle early. And hence, most of the clients who retain my firm settle their matters and I have learned, I hope, quite a bit about how to settle cases over the years. I'm gonna kick off this discussion with a discussion about taxes, and repeat after me with your name substituted for mine. I, Robert Fitzpatrick, am not a tax lawyer. Client, did you hear me? I, Robert Fitzpatrick am not a tax lawyer. I typically would say that to a client as early as possible in the relationship, and I would, unless you are a tax lawyer, and there are a few of us out there, I would repeat that mantra with frequency to the client and I would encourage the client to, if there's enough money at stake, to have their tax preparer, a CPA, or actually a tax lawyer. And there are a few out there, tax lawyers, who really know their stuff about settlement of employment cases, and there are some unique issues, tax issues, when it comes to the settlement of the employment cases. But you do not wanna put yourself in harm's way, tax-wise, by giving tax advice if, indeed, you simply are not a tax lawyer and you don't know what the hell you're talking about. Now, having said that, clients, with great frequency, assume that everything is nontaxable and you need to disabuse them of that belief early on, relying upon IRS publications. Pretty much everything in employment cases is taxable one way or another. There may be withholding, there may not be withholding, but it's taxable. We'll get to it in a moment. Physical injuries, which typically arise in personal injury cases, rarely in employment cases, if you can, your client can satisfy the physical injury requirements then they can tax-free some or all of a settlement. But you first want to disabuse them of the notions that they're not gonna pay taxes and they need to appreciate, early on, let's assume you are working on a contingency-fee basis, or you have deferred your payment of your full fee, and you're billing on an hourly basis and when the matter who resolves and the client has money, your bill is to be paid. The client needs to take the contingency fee, which may be 20, a third, 40% of the gross amount, that is, the pretax amount. That certainly is the way I structure my contingency fee agreements. I take a percentage of the gross before the tax man comes along. But the client, in determining what he or she is prepared to settle for, needs to take into account, in their math, if you will, your contingent fee, your fees, and the tax implications of the settlement. Because you do not want a client who is really ticked off at the end because the lawyer takes his or her share, the tax people take their bites out of the apple, and there is very little money left for the client, and you're gonna have an unhappy client who expected X in their pocket and ends up with a substantially lower amount. There are a host of IRS publications that you need to have in your quiver and send to your client. You're not, seems to me, you're not giving tax advice, you're simply passing along the IRS guidance. And there is good, well-written, comprehensive and comprehensible, written in pretty close to plain English, IRS guidance on pretty much all these issues that arise in settlement of employment cases, and you need to get those pubs and pass them along on to your client. Now let's jump to settlement, and you need to have your settlement agreement be very specific 'cause if you don't, do not, you're gonna run into potentially a host of problems with the tax people. And what I've seen is, more often than not, it's not the tax people, it's the payroll people, people who write the checks within the company that you are settling with. And if you're representing management, you want to give very specific instructions to your disbursement, your payroll people, so that there are not downstream issues about allocation, forms, tax treatments, so on. Typical allocation in employment cases, and I say typical, this is, you know, one size does not fit all, but your typical allocation is, some portion goes to lost wages, and therefore it is typically W-2 money and there are withholdings from it and you need to be very careful about your allocation and you need to be very careful about the allocation and the completion of the proper paperwork for a W-2 allocation. And then, typically, another portion of the settlement is a 1099-MISC, M-I-S-C, form settlement. And there are, if done properly, and many times the attorney's fees are not handled properly by management, but there would be a 1099 to the client of the other portion of the monies that the client is getting. And there's no withholding on the 1099 money, but it is taxable in the next tax year. Then there would be a 1099, typically, of the legal fee being paid to the lawyer and typically that 1099 should, there should also be a 1099 to the client in that amount. That creates, if you don't do your homework and advise your client in advance, that typically creates a great deal of angst on the part of your client who gets, they think, "Oh my god, I gotta pay taxes on what I paid my lawyer? I'm being, you know, double paid here and the lawyer has to pay taxes on it, and I have to pay ..." it doesn't make any sense. It is a complete wash, okay? It is a total deduction for the client. And take a look at the IRS pubs and use that to educate your client. Then, the tax forms that are typically filled out by the disbursement payroll people, you need to be very careful that they complete the correct forms and they check the correct boxes on the forms. And that should all be spelled out in the settlement agreement. Okay. Physical injuries and emotional distress, most employment cases these days request an award of compensatory damages for emotional distress. Footnote, take a look at the Supreme Court's opinion in the Cummings case this past '21-'22 term where they found that, in certain cases, there cannot be a claim for emotional distress. But typically in your say, let's say your Title VII case, Title VII of the '64 Civil Rights Act, there will be a claim for emotional distress. That is not a physical injury. Even if the person has headaches and stomach aches and yada yada ya, you know, those sequelae, if you will, of emotional distress, that is taxable 1099 income. Don't get drawn down that rabbit hole that is gonna get you into trouble with the IRS. If there is indeed, in your employment case, a physical injury that is directly related to your claim, then that may be a non-taxable sum of money in a settlement, okay? All right, let's move on to the release, and there can be many, many, many problems with the release if you approach it as, you know, just take the last agreement off the shelf and use it. Once again, one size does not necessarily fit all. I think there're kinda two schools of thought on releases. One is simple, all claims known and known, known and unknown since the creation of the world, and today, arising out of, related to the recruitment, employment, and termination of Joe Blow, John Doe, Jane Doe, doesn't refer to any specific claims, it maybe would be characterized as a general release. Then there is the school of thought that I usually follow. And that is, all claims known and unknown. Make sure you got that unknown language in there. I'll come back to that and I'll mow it with a very odd Florida case that I think you might want to take into account. Anyways, all claims known and unknown arising out of, or related to recruitment, employment, termination, including, and then I would, at least, list those that have been asserted, either in conversations, the demand letter, mediation, what have you, or the litigation. Sometimes I will go beyond those that have been articulated in one form or another, and I will list every possible federal and state statutory claim and state common law claims. You know, that's kind of the belt and suspenders approach to the release. Typically, you cannot obtain a release of future claims, and that takes me to this Florida case that I referred to. We now, most practitioners in this area, put that known and unknown language in. A Florida judge in Falsetto versus Liss, L-I-S-S, a fairly low-level judge, this is not way up the appellate chain but it's out there, and it's interesting and maybe, conceptually, it's correct. The judge says unknown claims cannot include claims that have not yet accrued because that is a future claim and you can't release future claims. So the judge allows a so-called unaccrued claim to go forward. Keep in mind, the unaccrued claim started to, my word, germinate, if you will, prior to the settlement, but nonetheless didn't, if you will, to follow the analogy, reach fruition and accrue until, according to the judge, after the settlement agreement and therefore was a future claim and not covered by the unknown language. So you may want to tinker with your unknown language in the settlements and put something in, dealing with claims that have, I guess, started to accrue prior to that date. Okay, ADEA, the age, federal Age Discrimination Act has very specific settlement requirements. There's a, if you will, lemon law, blow away the settlement for seven days after the settlement, which means you don't pay any money to the person until those seven days have gone by. Otherwise you could end up with a situation where you paid the person and then they then reject the settlement within the seven days, and they got the money and they still have the claim. There is a, for an individual, I'll put aside group settlements, for individual age settlements, that is, people over the age of 40, they get, but it's waivable, a 21-day period to consider the settlement. Now, if you are settling a case with someone 40 or older and therefore are settling an age claim, and let's assume the worst, that the person really didn't assert an age claim in the case, but they're over 40 and you got the, you know, you followed the drill under the Age Act and they then object to the settlement. Does that objection mean that all of the money is lost to them, or only that which is allocated to an age claim? This is an issue, pretty wonky, that has not arisen with any frequency in the courts. I certainly take it into account in my drafting of settlements. There's a California statute, 1542, which typically, even if you're not in California, just to be on the safe side, you may want to include in your settlement. Typically, we now state in the settlement document that we are not releasing because you cannot, without following very specific protocols, we're not releasing worker comp claims or NLRB claims that would go to the NLRB. Typically, plaintiff wants the release to be mutual and wants a release of all claims that the employer might have against the employee. If you have multiple defendants and you settle with one but not the others, you need to be very, very careful that you create a paper trail and the settlement documents are clear that this is only, this does not affect the claims against the others. Typically, people don't call it a release but they call it a covenant not to sue. I think belt and suspenders approach is, covenant not to sue is fine, but I would put in the document that it is the intent of the parties that this is not full satisfaction of claims and does not affect or reduce any exposure that the other defendants might have. Then, still probably a little bit wonky, but take a look at the DC Circuit Decision in August 30th, I think, of this year, in USA versus Honeywell and this deals with the proportional share or pro tanto argument that is made in some cases where there's been settlement with multiple defendants. And increasingly there are multiple defendants, I've certainly had such cases, and settled with some, not all, and you need to be very aware of the reasoning in the DC case and reasoning in these covenant, not just sue, cases that I referred to. Sometimes you settle and the client afterwards attempts to repudiate the settlement, saying that you did, you, lawyer, did not have authority to settle. You need to, and it's been a big issue in the District of Columbia, where I practice and have my office, you need to be very careful that you have express authority from your client to settle on the terms, such as settling, and then sometimes cases settle in open court and you need to be very careful, both sides, in articulating to the judge the specifics of the settlement. And, typically, the only thing the judge cares about, it's settled, and it's settled for X dollars. That's it. Next case, please. You want to spell it out with specificity because if one or both sides repudiates, or one or the other side repudiates the settlement, the judge is gonna say, "Hey, this case will settle itself." And if the term that is not being, is being breached but was not articulated in open court, you've got a problem, okay? Liens. Be careful, and deal with this early on in discussions with the client. Are there any medical issues? Typically, in employment cases, it would be, probably, emotional distress therapy with a psychologist. Has that been covered by an insurance carrier, Medicare, Medicaid? There will then be potentially a lien. You need to straighten all that out before you settle. Under the Secondary Medicare Payment Act there is huge potential liability. I think it says, I may be wrong, I think it's $1,000, maybe a day, I may be misquoting, but there is some substantial penalties for lawyers who screw up on Medicare liens. Also ask about, "Do you have any child support obligations that you haven't met?" 'cause, bingo, that's gonna come off the top of any settlement by the child support people. "Do you have any past taxes that you haven't paid?" That's also gonna go away. Okay. The attorney's fees. The check to the lawyer, and this, for obvious reasons, is important to me. Is it gonna be a check to you and a check only to you? Is it gonna be a check to you and your client that is sent to you? Or is it one check sent to your client? I know this is cynical and jaded, but if it's one check that goes to your client and your client is then expected, from that check, to distribute to you your fees, there are some clients out there who are gonna toy with you and not pay you at all or not pay you in full and then you're in litigation against your client. I like the check to me and me only. Now, there is an issue that I just thought of in the last couple of days and I called my ethics hotline to see what their position was and that is the check to you. Should it go, can it go directly to your operating or should it go through your trust account first? If there is still work to be done on the case, arguably, your fee has not yet been on and therefore goes to trust. And there may be other circumstances where, arguably, it ought to go to trust. The end of my discussion with the ethics hotline people was, why not, just as safe haven, always send it to trust and then get it outta trust to operating once it is clear as a bell that you have earned it, or otherwise you then have a co-mingling issue. So, sorry to introduce that problem, but it's something that occurred to me in the last days getting ready for this presentation. The non-disparagement clause, which has become pretty standard in employment cases. There is some statutory efforts to bar non-disparagement clauses you need a non-disparagement clause, you know, what does the word disparage mean? And the dictionary definition is not gonna help you. The defense management in a non-disparagement discussion of course wants it to be defamation. And management wants the agreement, with respect to the employee, that the employee will not disparage the company, that it will not badmouth the company, that it will not talk negatively about the company. I think the major, or one of the major concerns these days, by management, is Glassdoor. It is the online program Glassdoor that many people go to to evaluate a prospective employer. And there are anonymous posts put on Glassdoor that disparage, denigrate employers. So the non-disparagement clause will apply to anonymous online posts. But I have to say, I have yet to see a circumstance where an employer has attempted, you know, how do you, you're gonna have to force somebody, you know, you're gonna have to sue the client and get a court order to get access to their email, or Glassdoor to, you know, third party it and tried to get access to it. I've, you know, I think this online language that is typically now in settlement agreements is just in terrorem, if you will, language. I've never seen anybody try to enforce it. Now, that's not to say or to encourage, you should do just the opposite, that you don't want your client doing rants against the company on social media. And certainly if they are, you know, on Twitter, Facebook, LinkedIn, doing that, that is, in this era, much more readily accessible than an anonymous Glassdoor post. So your clients really need to take seriously the non-disparagement clause. Of course, if there is compulsion of law, you know a subpoena in some other case, then they can tell the truth as they see it at deposition, whatever. Okay. I'm just seeing in my notes here if there's anything else. A violation, you know, you're gonna get a clawback situation, confidentiality nondisclosure clauses in settlement agreements. This also has been an area of substantial controversy recently. What I go for in the, I have no problem with agreeing to a confidentiality clause. In fact, I warn my client from early on, even before we've agreed to one, which is typically at the back end at settlement, I will tell my client, you know, "Keep your trap shut. Don't be talking to coworkers, others about your grievances against the company." At the end of the day, when there is a settlement, have the settlement language apply only to the future. This goes to the disparagement clause also. It does not deal with past disparagement, it does not deal with past disclosures. So you're clearly, you know, if your client has been, excuse me, disclosing trade secrets that's a whole nother, you know, kettle of fish. I will want, what am I, my client, allowed to say? And, typically, we will agree to "The matter has been resolved." I'm happier if I can get, "The matter has been resolved to my satisfaction." If the client can say that to anyone who asks, "Hey, Jane Doe, whatever happened with that claim you had against the company?" If Jane Doe can say, "The matter has been resolved to my satisfaction and I can't say anything further," that, it seems to me, "to my satisfaction" suggests to the person who asked the question that she got a pretty decent deal. So if I'm management I just want, "The matter has been resolved," period, end of discussion, no "to my satisfaction." Now, this issue comes up with great frequency. Part of the settlement typically would be withdrawal of administrative charges, typically a charge filed with the Equal Employment Opportunity Commission, EEOC. And EEOC, oftentimes wants to know in particular, and I'm very cynical about this, forgive me, they wanna know how much money was paid because they then report that as a result of, you know, their efforts. In the past year they have obtained umpteen million in settlements. So they're gonna wanna know the amount of money. They didn't do squat, typically, but, you know, you and your client and the other side did all the work, but you know, they want to get the benefit from it. Sorry for the cynicism but that's the way the world goes around. So the confidentiality clause, you need to have a discussion with opposing counsel, of who makes the disclosure to EEOC of the amount of money. Obviously, you can disclose to the accountant and close family members. The defense may try to have anyone you're disclosing to within the family, that they understand that if they violate that and pass it along further, there's gonna be clawback of all the money paid or liquidated damages. And there's a Florida case where the settlor employee's daughter violated the non-disclosure and it resulted in the settling employee losing all the money. There's been quite a bit of activity in the state legislatures, Washington State, Maine, Oregon, of course California, dealing with confidentiality clauses, dealing with confidentiality clauses in sex harassment cases or dealing with confidentiality clauses across the board. Also, in the Tax Cuts and Jobs Act some years back, 162q of the tax code was amended. If there is a confidentiality clause in a sex harassment or sex abuse, and keep in mind that phrase sex abuse when you're representing or defending in a case against a priest or a church, sex abuse will be the way things are characterized. Anyways, if there is a confidentiality clause, the employer runs the risk of losing its tax deduction for its payments and its fees paid to external counsel in the matter. There's an IRS, I think it's a frequently asked question where they say the language of the amendment does not apply to lawyers for the employee and you, counsel, if you're representing the employee, do not, the employee and you don't lose tax treatment of the legal fees. That was a concern for the plaintiffs bar for some period of time. IRS has now cleared that up. A no rehire provision appeared with some frequency. Some of the legislatures are pushing back on this. Typically a no rehire clause will, you know, I call it the Never Darken My Door Again clause, will say the person won't apply for employment and the employer, in any event, has no obligation to hire the person. There's a piece of, for example, New York legislation, Senate Bill 766, which attempts to prohibit these. The concern that I often see that my clients have is, I don't have a problem, this is the client talking: "I don't have a problem with agreeing, you know, I , I don't wanna ever work for them again anyway, so I don't have a problem not going to work for them." But what if they expand and gobble up some, oh, you know, there's a merger acquisition, they gobble up some of their companies? And I had one client recently who was working in the, was a pharmacist and there was some risk that the company he was settling with might gobble up his new employer. So we had to address that and, you know, tailor the language that it wouldn't apply. Sometimes you wanna put geographic scope on these no rehires. Sometimes you wanna put temporal scope, you know, how long they apply. But certainly you do want to address the merger, acquisitions situation. No-poach employees, it really doesn't come up in settlements, but it's something that you need to be aware of. This is both sides of the aisle, the Antitrust Division of the Justice Department and the Federal Trade Commission. The FTC are getting more and more aggressive about no-poach agreements, you know, where, typically, a fast food will say, you know, have a deal with another fast food chain that you don't touch my employees, I won't touch yours. Clearly, such an agreement is a violation now of the antitrust laws. I have a PowerPoint on no-poach agreements. If you are interested, just email me and I'll shoot you a copy of it. The Federal Trade Commission is gearing up, I think, to be pretty aggressive about non-competes and non-solicitation agreements, and arguing that they cross the line into unfair trade practices. So you need to keep an eye on what's going on at the FTC. The withdrawal of the EEOC charge, I don't like to settle cases where the payments are contingent on EEOC actually withdrawing because there can be a substantial period of delay. So I like to predicate the agreement, you know, we will submit the appropriate form, completed, to the EEOC requesting withdrawal of the charge or to the state or local agency, anti-discrimination agencies, requesting withdrawal. But the settlement is a done deal once that paperwork has submitted. You need to have a carve-out, also, that the employee is not prohibited from filing a charge with the EEOC. You can have language, of course, that they can't get any money out of that matter, you know, if they're, you know, double dipping, so to speak, they can't get any money but they can still file a charge. We used to have clauses and I think they are, now I'm seeing them less and less, that prohibits the employee, the settling employee, from assisting others, or encouraging others to assert claims against the employer. The EEOC in its strategic enforcement plan for 2012, so, many years back now, prohibited such clauses in a release, submitted it for, you know, when you're seeking withdrawal, and they get into, you know, that level of detail and the EEOC has opined that it even considers such a clause to be a violation of the act. That seems to me to be a bit problematic. Pay date. I like a specific date on or before which payment will be made by the private employer, and I typically will get that with the federal sector, federal employees. This is a real problem just because of the bureaucracy that one has to go through to get the issuance of a check from the federal government. Unemployment. In DC, and I don't know if it is being aggressively enforced, but typically, and this may go under the category of liens, typically, the Department of Employment Services will demand from the settlement corpus, reimbursement of all unemployment comp that has been paid to the employee. Now, we do have one, I'm pretty sure this is correct, Court of Appeals decision to that effect. I'm not seeing a lot of enforcement effort in this space. But that's not to say that, you know, in whatever jurisdiction you're in, you need to research this issue. You know, theoretically does the unemployment payments go back to the state agency and you certainly need to let your client know of the potential risk. There also is legislation that says it is inappropriate to have clauses in your agreements that say that management will not oppose a claim for unemployment. I have seen virtually no enforcement efforts on that provision. FLSA individual settlements. This has become a extremely controversial area with the federal courts split. There does seem to be a trend, but it's just a trend, and this is an issue that you've got to run to ground in terms of, what is your judge, or your court, or your appellate court, you know, what are the rulings that are coming down on this issue? And that is, whether the court or the Department of Labor has to review and approve the settlement agreement. Nobody with any grain of common sense goes to the Department of Labor seeking approval, that's just gonna open a whole potential can of worms in terms of the department coming after your client. But, historically, the agreement had to be approved by a court and had to be approved as fair and reasonable. And the court would particularly be looking closely at the attorney's fees being paid to plaintiff's counsel. Since the Fifth Circuit's decision in Martin versus Spring Break, some years back, the courts, particularly district courts have been, I think this is the trend, moving in the direction of individual FLSA settlements do not need approval by the court. I'm looking at the clock on the wall and I wanna try to cover everything. That FLSA issue is very substantial. There's a lot of case law out there on that. Be very careful and, you know, if your settlement is clearly fair and reasonable and you don't have any definitive law in your court, my advice would be take your settlement to the judge so that you're not running any risk downstream. Term sheets, I hate 'em. I've had experiences where we've settled cases in mediation. At the end of the day, somebody takes out a sheet of paper and writes down the terms of settlement and then weeks, months later, finally there is a settlement, an official settlement agreement you want. There is great language of a term sheet, of all places, if you go SEC.gov, confidential settlement term sheet agreement. It's one of the best term sheet agreements that I've seen. This goes back kind of to the issue of express authority. Make sure your client finds the term sheet. Make sure your client has conferred express authority upon you. There is a risk here of malpractice, among other things. We kind of talked about this on liens, back taxes, and sometimes you will discover that your client owes money to the employer, or vice versa. The company has not yet paid, for example, business expenses. So it's an area to check off on your list. Last, and a very dicey area, but we only have a few moments, is the return of property. If you represent the employee, you want your client's property at the office returned. I don't like the company who says, "We will overnight it to your client's home." With a high degree of frequency, my clients come back to me complaining, "They didn't send me everything," or, "Things were broken." The bigger issue is return of company property and that gets into what your client may have on one or more of his or her electronic devices. And this is an area where, early on, when this became an issue, ooh, 10 years ago, I had to spend a lot of time and a lot of client money on resolving these issues. I think, for the most part, we've now got it down to a pretty simple protocol. You need to work with your client from the outset on your client not spoliating, destroying any evidence that he or she has, and you need to work with your client in terms of what devices do they have. And typically it is mixed with personal and office material and you need to work out a protocol where the other side doesn't invade your client's privacy. An issue that comes up with frequency is your client's contact list. Bring that up in discussions with your client and the other side. There's much more that I could say about the online return of property issue but we simply don't have time. I've enjoyed this. I hope I've been of some little help to you in learning some of the dos and don'ts in the settlement of employment cases. If you have questions for me please don't hesitate to email me at [email protected] Have a nice day, thanks a lot for attending. Bye-bye.

Presenter(s)

Robert Fitzpatrick
Attorney
Robert B. Fitzpatrick, PLLC

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