In the modern day of the litigious workplace, any employer, no matter how fair or professional, is bound to be sued or be the subject of some type of complaint or grievance. When that happens, the usual outcome is some type of settlement. No matter how frivolous or meritless the claim, most get settled for various reasons. Sometimes it's less expensive to settle the claim than to fully litigate the matter. Other times, the disruption to the business caused by litigation far outweighs the costs of a settlement. No matter what your motivations are for settling, you should make sure you get as much from the settlement as possible. The question is, "What can you get from settling a claim?"
Tips for settlement
The obvious answer is a withdrawal or "dropping" of the claim or lawsuit. That's the primary goal of any settlement. But there are other important goals that can be achieved. For example, if the employee has any other claims pending, including but not limited to lawsuits, Connecticut Commission on Human Rights and Opportunities claims, or demands for unpaid wages, overtime, unused sick time, or vacation time, the settlement process should be used as a vehicle for resolving all those outstanding issues. You should be sure that the settlement documents, commonly known as "releases," covers all types of claims that have been made or could be made by the employee.
If the complaining individual is still employed, you may also want to condition any settlement on his separation or retirement from your business. Lawsuits usually create a great deal of animosity between the parties, and it's usually in everyone's interest (especially yours) to have the complaining employee leave his position. The basic goal is to have the parties (employer and employee) part company and get on with the future. This goal usually can't be achieved if a disgruntled employee remains with the business.
In furtherance of that goal, you should also be sure that the settlement documents contain a clause stipulating that the employee will never seek employment with your business in the future and that any such employment will be denied. While this clause may appear unnecessary, you want to be sure that the relationship between the parties is forever severed and that the employee will have no possible grounds to file a lawsuit in the future.
You also need to make sure that, to the extent that any settlement isn't paid through your normal payroll, the settlement documents contain a clause in which the employee accepts full responsibility for any taxes that may be due on the settlement. While lawyers like to characterize any settlement as "compensation for pain, suffering and humiliation," the federal government tends to take a different approach. In dealing with settlements from employment disputes, the IRS usually attempts to categorize everything as taxable wages. Therefore, it's always helpful to explicitly spell out in the settlement agreement that the employee will be responsible, and hold you harmless, for any tax liability that could result from the settlement.
Finally, in any lawsuit, there's bound to be bad blood and ill will on both sides. The employee will naturally seek employment in the future, possibly in the same or a similar field. He won't want any negative comments, information, or stories floating around that could jeopardize his ability to obtain employment. As for the employer, you naturally don't want to have disgruntled former employees badmouthing your business to the public, competitors, or other companies with which you transact business.
To achieve that goal, you need to incorporate a "nondisparagement" clause into your settlement documents. That type of clause contractually binds the parties and prohibits them from making negative or disparaging statements about each other. A violation of the agreement will normally result in monetary penalties, which are also incorporated into the settlement documents. For example, such clauses usually state that if the former employee makes disparaging comments about you or your business, he must pay you $5,000 or whatever amount is agreed to in the settlement documents.
Bottom line
The primary goals of any settlement are to (1) resolve the pending claim or lawsuit; (2) resolve any other claims that have been made or could be made, (3) prevent any future lawsuits, (4) end the relationship between the employee and employer when desired and possible, and (5) allow the parties to move into the future without any lingering effects from the claim or lawsuit. You should try to achieve as many of these goals as possible when settling a claim. Remember, as the party paying the money, you have some leverage in trying to achieve the goals, so it's in your interest to take full advantage of the settlement process.
Reprinted with permission of publisher. First appeared in Connecticut Employment Law Letter (February 2003). For subscription information, call (800)274-6774.