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by D. Gregory Valenza | The Daily Journal | Nov 2, 2007

Like all civil litigation, most employment law cases are resolved before trial. However, the plaintiff rarely just gives up.

The court dismisses some matters involuntarily, whether by demurrer or motion for summary judgment. Other employment law cases are settled in exchange for money.

Raising the possibility of settlement is not generally viewed as a sign of weakness anymore. Courts require parties to discuss settlement, and frequently impose mandatory “alternative dispute resolution” proceedings, such as mediation.

Incentives to Settle

There are, of course, cases that should be settled early. For example, certain laws are unclear regarding whether an employer may be held liable. Some lawsuits allege employer policies violate wage and hour laws, thereby creating the potential for class-wide relief and penalties. And sometimes, despite employers’ otherwise good policies and intentions, the people who work for them make decisions with legal consequences.

Other lawsuits, though, are settled for reasons largely extraneous to the legal merits of the dispute. Decisions to settle employment law claims before trial are motivated by a number of factors. For example, some believe that because nearly all jurors are employees, their sympathies will lie with an employee claiming mistreatment by his or her employer. The “cost of defense” argument is also frequently invoked as a reason to settle, usually by well-meaning parties other than the defendant.

Employers understand that litigation involves time and attention drawn away from business interests. Many employers now purchase insurance against employment claims, known as EPLI. EPLI carriers also frequently desire early settlement to avoid potential exposure and defense costs.

Finally, although adverse publicity in run-of-the-mill cases is rare, the potential for negative press may be another reason employers choose to make peace rather than fight.

Attorney Fees

In addition to the above incentives to settle, employers face potential exposure not only to damages, but also to an award of the plaintiffs’ attorney fees where authorized by statute. The Fair Employment and Housing Act provides for the award of fees for prevailing plaintiffs in cases alleging employment discrimination, harassment or retaliation. The Labor Code also authorizes attorney fees for certain claims involving wage-hour issues.

Attorney fees awards are based primarily on the “lodestar” formula: the time expended multiplied by an appropriate hourly rate. With lawyers’ hourly rates what they are, the amount of a potential attorney fees award easily can exceed the damages claimed.

For example, the employee-plaintiff may have quickly obtained substitute employment at a higher rate of pay, but sued for discriminatory discharge under FEHA. Alternatively, the plaintiff may have sued for “failure to engage in the interactive process” under disability discrimination law, even though he was discharged for a legitimate business reason. A plaintiff may sue for a hostile work environment without any proof of damage other than “normal” emotional distress. In these cases, the “hard” damages exposure might be negligible, or even in the five-figures, but the potential attorney fees award could be $250,000 or more.

In these cases, the prospect of an attorney fees award provide plaintiffs with settlement leverage. Naturally, plaintiffs’ attorney, settlement judges and mediators are keenly aware of this advantage. They use it to obtain settlements that may not be proportional to the risk of an adverse verdict alone.

Mitigating Liability

The statutory “offer to compromise,” contained in Code of Civil Procedure Section 998 may provide employers with a strategy to mitigate the attorney fees argument. The purpose of Section 998 is to discourage litigation when a reasonable settlement offer is put on the table. The statute achieves this goal by creating a significant financial penalty when a plaintiff fails to obtain a judgment that is more favorable than the offer.

Section 998(c)(1) provides, in pertinent part: “If an offer made by a defendant is not accepted and the plaintiff fails to obtain a more favorable judgment or award, the plaintiff shall not recover his or her post-offer costs and shall pay the defendant’s costs from the time of the offer.”

Simply said, if the plaintiff rejects a settlement offer, he or she must obtain a verdict (plus attorney fees and costs through the date of the offer) that exceeds the offer to compromise. If the plaintiff obtains a judgment for less than the offer, Section 998 imposes a financial consequence. First, the plaintiff does not recover any costs or fees incurred after the date the Section 998 offer was made. Second, the plaintiff actually has to pay the defendant’s costs incurred after the offer date.

Here is how the Section 998 offer works in practice. In Steele v. Jensen Instrument Co., 59 Cal. App. 4th 326 (1997), the plaintiff rejected a Section 998 offer for $40,000. She won a verdict of $21,078 after trial. The trial court in its discretion declined to award any attorney fees, in part because her claim did not meet the Superior Court’s jurisdictional minimum of $25,000. Therefore, her total recovery was $21,078, about half of the $40,000 Section 998 offer. Applying Section 998, the trial court awarded the employer $35,462 in costs incurred after the offer. The court of appeal affirmed the judgment.

If the defendant had not issued the Section 998 offer, the plaintiff might have won $21,078, plus her costs through judgment, and possibly a six-figure award of attorney’ fees. On the other hand, if the plaintiff had accepted the $40,000 offer, the litigation would have ended, the plaintiff would have recovered more than she ultimately did after trial, and the court and the defendant would have been spared the needless expenditure of time and money.

Practice under Section 998 is as simple as making a written offer, whether in a letter or on a pleading. The offers are interpreted like any other contractual offer. However, some courts will construe any ambiguities against the offeror, which means against enforcement of the cost-shifting provisions.

As with any contract, the offer may be withdrawn at any time before it is accepted. However, to be effective, the offer must remain in place for 30 days or until 10 days before trial, whichever comes first.

Avoiding Traps

There are, however, some traps for the unwary. Most importantly, the offer must be worded correctly. Significantly, if the offer is silent regarding costs and attorney’ fees, then the plaintiff is entitled not only to the amount stated in the offer, but also to apply for costs and – if allowed by law – attorney fees. Therefore, it is important to expressly state in the offer that it includes costs and attorney’ fees.

Section 998 offers legitimately may include “terms and conditions,” such as a release rather than an offer for the plaintiff to take judgment against the defendant. But potential problems arise when the offer is conditioned on non-monetary relief. This is because the trial court may be unable to determine which party obtained the more favorable result.

In Barella v. Exchange Bank, 84 Cal. App. 4th 793 (2000), for example, the defendant required a confidential settlement as a condition of acceptance. The court of appeal held the trial court correctly declined to enforce the Section 998 penalties against the plaintiff because it could not determine the “value” of the confidentiality provision and therefore could not assess whether the plaintiff obtained a judgment “more favorable” than the offer.

Finally, as a matter of strategy, a Section 998 offer usually will be more effective as a settlement tool if it is made earlier in the case. This is because as litigation drags on, the plaintiff’s pre-offer attorney fees mount.

If the case has progressed, it may be appropriate to consider making the offer exclusive of attorney fees and costs. Of course, doing so will permit the plaintiff to accept the award and then apply for whatever attorney fees the court will award through the offer date. But if the plaintiff does not accept the offer, the issue of high attorney fees through the offer date will be neutralized. The plaintiff therefore will be forced to obtain a verdict in excess of the offer, because the offer already permitted the plaintiff to recover fees and costs through the offer date.

There may be good reasons to settle an employment dispute before trial. Used correctly and in appropriate cases, the statutory offer to compromise may help the employer avoid paying too much.