JAMS ADR Blog by Chris Poole
Why do some employment mediations get off to a bad start?
Abby Silverman: Sometimes it is timing, it is too early or too late in the process. But frequently it is due to unhelpful initial demands and counteroffers. So, for example, a plaintiff may demand the sum of lost wages and future wages, and add unrealistic emotional distress and punitive damages. And then, the defendant may respond with a nuisance value counteroffer. It is understandable that both parties want to maintain negotiating space but demands that are not tied to some factual underpinnings and counteroffers that merely send the message that “you have no case” can get parties off to a rocky start with both sides losing credibility with each other. If the plaintiff ties the initial demand to the facts or a justifiable damages model or actual verdicts for similar cases, and the defendant cedes that there will be costs to avoid even if it is successful, then the mediation can begin with constructive conversations about settlement without as much negativity.
Cyrus Dugger: When faced with a lowball counteroffer, the mediator and plaintiff’s counsel may have to spend significant time talking the plaintiff off a ledge. Indeed, these types of counteroffers frequently cause highly negative reactions, including making plaintiffs feel that their experiences and pain are being trivialized, instead of encouraging problem-solving and the willingness to make a deal that is the foundation of many successful mediations.
What does a different negotiation approach look like in practice?
Cyrus: Assume that the plaintiff’s demand is $100,000 and the defendant’s settlement ceiling is $40,000. Defendant’s counsel certainly could make a counteroffer of $1,000 to send a message that they think plaintiff’s opening bid is too high.
Alternatively, the defendant could make a $10,000 counter but communicate a range of $10,000 to $60,000 via a bracketed counteroffer or through other less direct messaging. If the defendant’s settlement ceiling really is $40,000, it would lose nothing by signaling a potential settlement amount of $35,000; i.e., the midpoint of a $10,000 — $60,000 bracketed counterproposal. And by offering $10,000 instead of $1,000, the defendant wouldreceive the benefit of putting real money on the table for the plaintiff to start considering losing if they walk away. Human psychology just makes it harder for a party to give up something concrete even if it is just a start to the negotiation.
What if parties hit an impasse?
Abby: Cyrus’s idea of bracketing is also a way of breaking an impasse later in the mediation. Another idea is to discuss tax allocations earlier than we customarily do, which may offer another way to break through. Traditionally, defense lawyers have been reluctant to allocate the total settlement payment as a 1099 allocation in employment matters. But this reluctance may be a missed opportunity. Allocating the entire settlement amount as a 1099 payment, when there is appropriate support for doing so based on the types of available damages for the claims, can provide a substantial opportunity to push a deal over the finish line to resolution.
Why can tax allocations make such a big impact?
Cyrus: From the plaintiff’s point of view, the allocation of 100% of the settlement as a 1099 payment can feel totally different than a full W-2 payment or even a 50/50 split between W-2 and 1099. For example, consider the case of a $75,000 settlement payment. While the defendant pays $75,000 regardless, with a 1099 allocation, the plaintiff’s immediate cash in hand—after a 33.33% contingency fee—is $50,000 (although it is important to note that this payment will eventually be taxed when the plaintiff files income taxes in April of the following year). In contrast, because the IRS requires employers to withhold taxes from employment settlement payments at a similar rate as for bonus compensation, if this same settlement is paid exclusively as W-2 wages, the plaintiff will be left with only approximately $27,500 in hand — a little more than half of a pure 1099 payment. Similarly, even with a 50/50 split, the plaintiff’s net on hand is only approximately $38,750—about 22.5% less than a pure 1099 allocation.
What impact can tax allocations have on defendants?
Abby: I am told by defendants’ counsel that their clients can get more mileage from the same dollar amount by paying a settlement via 1099. For example, suppose defendants’ counsel cannot obtain authorization to increase an offer from $60,000 to $75,000. In that case, they could combine their best and final offer of $60,000 with a stipulation that this amount will be paid via 1099.
How can a mediator’s fee play into settlement negotiations?
Cyrus: The financial positions of employers and most employees are usually quite different. In a single-plaintiff case, where the employee earns under $100,000 a year, the traditional arrangement of splitting the mediation fee may not be the most effective arrangement to maximize the chances of success. While defense attorneys often argue that the plaintiff needs to have “skin in the game,” for a middle-class plaintiff, splitting a professional mediator’s fee can often feel more like having an arm, leg, or vital internal organ “in the game.” When plaintiff’s counsel can say that the other side has agreed to pay for the mediation as a show of good faith, the plaintiff is potentially coming to the mediation with an entirely different mindset, more focused on reconciliation and moving forward instead of primarily on punishing the defendant as much as possible. This good-faith gesture can help to build the trust required to reach resolution.
Abby: And in most cases, the defendant has already concluded that the additional incremental cost of the mediation fee is not so significant as to warrant jeopardizing a settlement that is imminent. Making that offer early has the added advantage of inspiring goodwill.