Because settling employment claims can be allowable if reasonable, contractors should take the approach of confirming the prudence of taking a settlement as well as the reasonableness of the amount settled for.

If the contractor concludes it is a good business act to settle once litigation has commenced, the best chance of achieving cost allowability is to reach an advance agreement with the Government prior to final settlement of litigation. The contractor will need to assemble a package demonstrating it was prudent to defend as well as subsequently settle in order recoup its litigation and settlement costs. Examples of evidence that litigation was a prudent act might include (1) memorandum from corporate management that justified the decision along with advice and opinions relied on (2) synopses of evidence and legal rationales supporting the company’s decision and (3) authoritative opinions by experts that these type of lawsuits should be defended.

To recover settlement costs, appropriate language of the settlement agreement must be drafted. FAR 31.205-47 states that up to 80% of the legal costs related to a government-initiated proceeding may be allowable if the company succeeds in its defense and is not assessed monetary penalties or if the company settles the case and the settlement agreement specifically provides for allowability. So, if initiated by the Government, the settlement agreement should unequivocally state the parties agree that the litigation costs are allowable. In any other settlement agreement (initiated by either the government or a third party – employee), the agreement should strongly and clearly state it (1) does not constitute or suggest an admission or finding of wrongdoing (2) is based on a rational assessment by the parties of their respective business and legal risks and (3) characterizes the settlement costs as compensatory (e.g. for breach of contract, emotional distress, or pain and suffering) rather than punitive damages. For the last point, case law indicates costs are more likely to be held allowable, whether for judgments or settlements, if they are for compensatory rather than punitive damages.

As for timing, if the contractor is inclined to settle, it is far better to do so before rather than after an administrative or judicial judgment. It will be much more difficult to recover its costs after it is clear that the contractor violated the law.

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