Settlement

Why this matters

Most employment cases settle. Offers can come early, in the middle of discovery, or on the eve of the hearing. Knowing how offers can be used, and what a good agreement contains, keeps you from giving up claims, privacy, or money you did not need to give up.

This is general information, not legal advice. A settlement agreement is a binding contract, so this is a good point to pay for a one-time review by a lawyer if you can.

Keep a record of every offer

Write down the date, who made the offer, the setting, and the terms. Keep the origin of each offer clear. An offer made before the case, during a mediation session, and during the arbitration may be treated differently.

Offers as evidence

The rules

Federal Rule of Evidence 408 bars use of two things, on behalf of any party, "either to prove or disprove the validity or amount of a disputed claim or to impeach by a prior inconsistent statement or a contradiction." They are offering or accepting valuable consideration to compromise the claim, and conduct or statements made during compromise negotiations about the claim.

New York's CPLR 4547 is the state example. It makes inadmissible, "as proof of liability for or invalidity of the claim or the amount of damages," offers or acceptance of valuable consideration to compromise a claim "which is disputed as to either validity or amount of damages," and any conduct or statement made during compromise negotiations. Other states have their own versions. Look up yours.

The disputed-claim threshold

Both rules apply only when a claim is disputed. In Pierce v. F.R. Tripler & Co., 955 F.2d 820, 827 (2d Cir. 1992), the court said "Both the timing of the offer and the existence of a disputed claim are relevant to the determination." It added that where a party is represented by counsel, threatens litigation, and has started the first administrative steps, an offer between attorneys is presumed to be within Rule 408. The party who wants the offer admitted "must demonstrate convincingly that the offer was not an attempt to compromise the claim." That case involved lawyers, so a self-represented setting may look different. Still, once you have a demand on file and the employer has denied it, the claim is very likely disputed.

The "another purpose" exceptions

Both rules allow use of the same evidence for another purpose, such as proving a witness's bias or prejudice, or negating a contention of undue delay. Pierce draws the line. At 829, the court held that using an offer to show the employer's motive goes to liability, so it does not fit the "other purpose" exception. Pierce at 826 also treats failure to mitigate as going to the amount of the claim, so that is not an exception either.

Arbitrators have discretion

An arbitrator is not bound by court evidence rules. AAA Rule R-33(a) says "Following the legal rules of evidence shall not be necessary." The New York Court of Appeals said in Matter of Sprinzen (Nomberg), 46 N.Y.2d 623, 629 (1979), that the arbitrator is "not bound to abide by, absent a contrary provision in the arbitration agreement, those principles of substantive law or rules of procedure which govern the traditional litigation process." JAMS Rule 22(f) bars prior settlement offers. Check your agreement and the rules your case uses.

So an arbitrator may admit more and weigh less. Treat Rule 408 and CPLR 4547 as persuasive, and expect that the policy behind them will carry weight. Do not plan to show the panel an earlier offer.

What this means for you

• You may mention an earlier offer to the other side during negotiation. It may help you set your number.
• Never put numbers in front of the arbitrators. Not offers, not demands, not talk of numbers. It can taint the panel and break a confidentiality term.
• An offer made outside a mediation may not be covered by the mediation confidentiality agreement. That does not make it admissible. Read the agreement itself, not your assumption.
• Do not describe what was said in mediation in your discovery answers or filings.

Negotiating

1. Anchor with your damages worksheet from Chapter 12. A number with a reason is easier to hold than a bare number.
2. Do not feel pressed to move toward a low first offer.
3. Know your walk-away point. If you are ready to try the case, say so calmly. It helps you negotiate without fear.
4. Put deals in writing at once. A verbal agreement is not final. Key terms in an email right away.
5. Keep your deadlines alive. Until an agreement is signed, keep a calendar of every date in the schedule. A collapsed deal leaves you behind.
6. Tell the arbitrators or the administrator when you reach a deal, and ask to suspend deadlines. Give notice only. Do not give the amount.

Agreement terms checklist

Do not sign until you have read the whole agreement.

Release scope

• It should cover the claims you asserted, not unknown future claims.
• Carve out agency rights, unemployment, vested benefits, and claims against third parties you want to keep, such as a leave administrator or insurer. Check whether deadlines on those claims are running.
• Do not agree to disclose medical records or waive privilege.
• Ask for a neutral reference and a no-admission clause that matches what you need.

Confidentiality and non-disparagement

New York is the worked example. General Obligations Law 5-336, as revised in 2023, sets these rules for claims of discrimination, harassment, or retaliation.

• An employer may not include a term preventing disclosure of the facts of a discrimination, harassment, or retaliation claim "unless the condition of confidentiality is the complainant's preference."
• The term must be in writing in plain English (and in the complainant's primary language, if applicable). The complainant has up to 21 days to consider it. If confidentiality is the complainant's preference, it must be put in an agreement signed by all parties, and the complainant then has at least 7 days to revoke. The agreement is not effective until the revocation period ends.
• Such a term is void to the extent it bars cooperating with a government investigation, or disclosing facts needed to get unemployment insurance, Medicaid, or other public benefits.
• A release of these claims is unenforceable if the agreement requires liquidated damages for breaching a nondisclosure or non-disparagement clause, requires giving back consideration for a breach, or requires you to state that you were not subjected to discrimination, harassment, or retaliation.

New York's CPLR 5003-b sets the same preference, 21-day, and 7-day rules for claims resolved in litigation.

California is a second example. CCP 1001 limits terms that restrict disclosure of factual information about harassment, discrimination, or retaliation claims, and Government Code 12964.5 limits clauses in severance agreements, with an exception for negotiated settlements of claims already filed. Several states limit these clauses. Check yours.

The federal Speak Out Act, 42 U.S.C. 19401-19404, is narrow. It covers only sexual assault and sexual harassment disputes, and only nondisclosure or nondisparagement clauses agreed to before the dispute arose.

Read any non-disparagement term before you write publicly about your case. Watch for clawbacks and repayment terms tied to breaches.

Age claims

If you are bringing an age claim, the Older Workers Benefit Protection Act, 29 U.S.C. 626(f), sets rules for a valid waiver. It must be written in plain terms, refer to age discrimination rights, not waive future claims, give extra consideration, advise you in writing to consult an attorney, give at least 21 days to consider (45 for group programs), and allow 7 days to revoke. A shorter list applies to settling an EEOC charge or a court action. The statute does not mention arbitration, and we did not find a case on whether the shorter list applies to settling a pending arbitration. Until you know, expect the full list to apply.

Taxes

Ask a tax adviser before you sign. The way the agreement allocates payments matters.

• IRS Publication 4345 says the part "for lost wages (i.e., severance pay, back pay, front pay) is taxable wages." The payer withholds employment taxes on it. IRS Publication 957 treats back pay as wages reported on Form W-2.
• Emotional distress is taxable income unless it comes from a physical injury or physical sickness. Publication 4345 says that if the proceeds "do not originate from a personal physical injury or physical sickness, you must include them in your income," reduced by medical costs for the distress that you did not deduct before. The statute behind this rule is 26 U.S.C. 104(a)(2).
• Non-wage amounts are usually reported on a Form 1099. Ask the employer what it will issue.
• The IRS generally will not disturb an allocation consistent with the substance of the settled claims. Do not pick an allocation just to lower your taxes.

Payment timing

Get a clear deadline, a payment method, and a consequence for late payment. New York's CPLR 5003-a requires a settling defendant to pay within 21 days after the plaintiff delivers a signed release and a stipulation ending the action, and lets an unpaid plaintiff enter judgment. It speaks of an "action," and it is unsettled whether it reaches an arbitration settlement. Write a payment deadline into the agreement.

Other points

• Check whether the payment affects public benefits or insurance.
• Decide how the case will be closed with the administrator and who sends the notice.

Before you sign

• Release limited to the claims you asserted, with carve-outs you need.
• Confidentiality and non-disparagement terms checked against your state's law.
• No medical-record or privilege terms.
• Tax allocation and forms (W-2, 1099) agreed in writing.
• Payment deadline, method, and late-payment consequence written in.
• Review and revocation periods noted on your calendar.
• Case deadlines kept alive until the agreement is signed.

Check your state

• Your state's version of the offer-to-compromise rule.
• Whether your state limits confidentiality, non-disparagement, or no-affirmation clauses, and what review and revocation periods apply.
• Whether a statute sets a deadline for paying a settlement, and whether it reaches arbitration.
• Which state taxes apply to a settlement.

Next: Chapter 14, The hearing.

Sources

• Federal Rule of Evidence 408 (compromise offers and negotiations)
• New York CPLR 4547 (compromise and offers to compromise)
• New York CPLR 5003-a (prompt payment after settlement)
• New York CPLR 5003-b (nondisclosure agreements)
• New York General Obligations Law 5-336 (nondisclosure agreements)
• AAA Employment Arbitration Rules (R-33 evidence)
• JAMS Employment Arbitration Rules (Rule 22 evidence)
• 29 U.S.C. 626 (ADEA, including the OWBPA waiver rules in 626(f))
• 42 U.S.C. 19403 (Speak Out Act)
• 26 U.S.C. 104 (damages excluded from income)
• IRS Publication 4345, Settlements: Taxability (PDF)
• IRS Publication 957, Reporting Back Pay (PDF)