• Complexities of Settling Employment Claims: Considerations
  • March 5, 2018 | Author: James W. "Bill" McCord
  • Law Firm: Berman, Berman, Berman, Schneider & Lowary, LLP - Los Angeles Office
  • All employment cases have their own unique facts. Attorneys, employees and employers must carefully consider all consequences concerning the tax ramifications of the settlement of a claim. Given that complex tax laws change often, it may be advisable to also consult with a tax attorney.

    Generally, nearly all settlement monies are included in a plaintiff’s taxable income and may include, e.g.,back wages, front pay and emotional distress. Some settlement funds that may not be included are certain payments for attorneys’ fees and/or payments to compensate the plaintiff for damages related to physical injuries or illness.

    Injuries typical to employment claims more than likely include “soft” injuries (not actual physical injuries or illness). These include headaches, insomnia, stomach disorders, etc., and these will generally be included in the plaintiff’s gross income.

    Settlement payments for attorneys’ fees have many exceptions based on the complexity of the issues and the type of injuries/damages claimed. The settlement agreement generally controls the treatment of settlement monies. There should be express language regarding the allocation of the proceeds regarding the specific types of damages, as the allocation would be generally binding for tax purposes.

    Payment of settlement monies impose two primary reporting methods to the Internal Revenue Service: (i) Treasury Form W-2; and (ii) Treasury Form 1099 – MISC as “Other income.”

    It is vitally important to scrutinize the specifics of the claims and current tax laws when drafting employment law settlement agreements in order to protect the employer from future settlement-related tax liabilities.