Settlement Options

One of the great benefits of mediation is that it offers the parties a chance to be creative in coming up with ways to resolve their dispute. In an employment lawsuit, often the only question is whether or not one party will have to pay money to the other.

1. Non-Monetary Settlement Terms

Often, a fired or unhappy employee has concerns other than money. For example, the employee may want to find another job, maintain health insurance coverage, switch to a different position in the company, or simply receive an apology. And coworkers who have a problem might simply want a reasonable system for communicating with each other and preventing future disputes. While a court would never order any of these options, you can agree to them in mediation.

Here are some settlement ideas that don’t involve money changing hands:

• continued employment

• a different reporting relationship—for example, that the employee will work for a different supervisor or that the employee and super­visor will work together differently

• a consulting relationship between the employee and the company

• letter of reference

• active assistance with the employee’s job search—for example, the employee’s supervisor might agree to follow up with colleagues at other companies who may have suitable positions open mutually acceptable explanation of why the employee left the company

• agreement by the employee to drop a pending agency charge or lawsuit

• agreement by the company to remove items from the employee’s personnel file, such as a poor performance review or written warning

• outplacement services

• continued payment of insurance premiums for health insurance, life insurance, and so on

• nondisparagement agreement—that is, an agreement that the parties will not bad mouth each other

• apology

• an agreement not to contest a former employee’s claim for unem­ployment compensation, or

• transfer or continued use of company property—for example, that a former employee can keep or use a company computer, cell phone, tools, or vehicle.

2. Monetary Settlement Terms

Even if your dispute is likely to boil down to dollars and cents, there are some creative ways to structure a monetary settlement in mediation. Generally, the purpose of these alternative arrangements is to make the settlement more valuable—either by making it possible for the employer to pay more or by making the payment itself more beneficial to the employee. Here are some examples:

• Installment payments may make it possible for an employer to afford a larger settlement—and save an employee from the huge tax bill that would result from getting all of the money at once.

• The employer can purchase an annuity from a life insurance com­pany, which then makes periodic payments to the employee over time. The employee doesn’t pay tax until the money is received; this can lower the employee’s income tax liability considerably.

• Other forms of compensation—such as stock or stock options, increased contributions to a pension or other retirement plan, or continued provision of benefits—might be easier for the employer to provide, and very valuable to the employee.

• Employer and employee can agree on a period of continued work, either as an employee or as a consultant. Often, an employee is not asked to do any real work during this period; instead, the arrange­ment allows the employee to keep receiving a paycheck and tell prospective employers that he or she is still employed with the company (which makes it a lot easier to find a new job).

• The parties can agree to characterize the payment in a manner that is most likely to result in tax savings to the employee. For example, most severance packages and settlement amounts are fully taxable to the employee when the money is received. However, there is an exception for settlements of bodily injury claims—this money is not taxable. If the employee made a claim for physical injuries (some sexual harass­ment claims and claims for extreme emotional distress resulting in physical symptoms fall into this category), the parties can agree that at least some of the settlement money is attributable to those claims. Of course, the IRS will make its own determinations about what is taxable and what is not, but characterizing claims in this way in the settlement agreement can only help the employee’s cause.

If you’re seriously considering putting together a creative monetary settlement, be sure to talk to a tax adviser, CPA, or other financial expert. These professionals can help you figure out which arrangements will be most beneficial in the long run—and make sure that your agreement will hold up under legal or IRS scrutiny. ■