No one should suffer in an abusive environment.
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ty provision is remote. There is usually
little for the defendant to benefit, and
there are usually reasons not to try. It is
also clear that the indemnity provision
may not accomplish what the defendant thinks it will.
Again, what if some or all of the settlement payment to the plaintiff is really
wages? Suppose that the defendant issues a gross check and reports the settlement figure on a Form 1099. Later, the
IRS claims that some (or all) of the settlement is wages subject to withholding.
In virtually every employment case,
at least some of the settlement payment
should be wages subject to withholding.
Not all of the money may be wages, but
failing to consider wage exposure would
be a mistake. 2 And plainly, if there is
any failure to withhold liability, it resides
squarely with the defendant employer. The
IRS will pursue the defendant for all the
withholding money, interest, and penalties.
As a matter of contract law, the defen-
dant can demand indemnity, and then
can try to go after the plaintiff for that. But
unless the indemnification agreement is
explicit that it covers failure-to-withhold
liability, it may be very hard to enforce.
Besides, the IRS certainly will not release
its hold on the defendant employer, what-
ever the indemnity provision may say.
There is also an enormous practical
barrier. Trying to enforce an indemnity
provision (at least against a former
employee) is almost always a mistake.
Most lawyers will advise the defendant
not to even try to pursue the plaintiff,
since the indemnity litigation can back-
fire. If the defendant thinks that some or
all of the settlement money is wages, the
defendant should withhold.
Most often, the money in an em-
ployment case should be allocated into
several categories. Reasonable minds
can differ on whether 10 percent or 90
percent is wages, or something in be-
tween. But a portion is probably wages.
An indemnity provision does not hurt
anything, but it probably does not help
This is not to say that the defendant
cannot take a calculated risk that withholding is required, yet still settle and not
withhold, reporting the entire payment
on a Form 1099. It happens, frequently
in fact. Employers sometimes settle a
case that (from a business perspective) must be settled, where the plaintiff insists that if there is any withholding, the plaintiff will not settle.
In an ideal world, perhaps the defendant should offer more money to
settle. That way, the defendant can
withhold if required, and the plaintiff
can still collect a net payment that the
plaintiff finds acceptable. But in the