998 Offers and Employment Lawsuits: Why Employees Don’t Need to Be So Concerned

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March 19, 2020

Generally, each party to a lawsuit in California pays his or her own attorneys’ fees and costs (unless otherwise provided for by statute or contract).  However, this burden can be shifted from one party to the other through the tactical use of a statutory offer to compromise pursuant to California Code of Civil Procedure section 998 (a “998 offer”).

A 998 offer is essentially a settlement offer with strings attached.  Any party (although more often the defendant) can make a statutory offer to compromise to the other, and if the other party rejects that offer, and then later fails to obtain a more favorable judgment at trial (or in arbitration), that party faces certain financial penalties.  For instance, a plaintiff who rejects a defendant’s 998 offer, and does not thereafter obtain a more favorable judgment, cannot recover “costs” incurred after the 998 offer was made (though could still recover pre-offer costs if he is the prevailing party), and he must pay the defendant’s post-offer “costs.”  “Costs” in this context include attorneys’ fees if authorized by statute or contract.  [Code Civ. Proc. §§ 998, 1033.5(a)(10).]

This can be a powerful tool to encourage settlement, as parties have to seriously consider the value of their case before rejecting reasonable settlement offers and instead gambling at trial.  Failure to accept a reasonable 998 offer can have disastrous financial consequences, as the party rejecting the offer would be responsible not only for his own fees and costs incurred throughout the entire action, but his opponent’s post-offer fees and costs as well, which could be a very large amount.

998 offers, however, are not necessarily as intimidating in employment lawsuits.  California is a very employee-friendly state, and has enacted many laws protecting employees’ rights, both at the workplace and in litigation.  For instance, in actions brought under the California Fair Employment and Housing Act (“FEHA”), which include discrimination, harassment, and retaliation lawsuits, prevailing plaintiffs (employees) are entitled to reasonable attorneys’ fees and costs (including expert witness fees).  Prevailing defendants (employers), however, cannot recover their attorneys’ fees and costs unless the court finds the action was “frivolous, unreasonable, or groundless when brought, or the plaintiff continued to litigate after it clearly became so.”  [Gov. Code § 12965(b).] This “frivolous, unreasonable, or groundless” standard is difficult to meet, so essentially even if plaintiffs lose in their employment suits brought under the FEHA, it is highly unlikely defendants will be able to recover their attorneys’ fees.

The same is true for many actions employees bring for wage and hour violations (such as failure to pay minimum wage or overtime, nonpayment of wages, failure to provide itemized wage statements, etc.).  Many of these Labor Code sections have one-way fee-shifting provisions (only for plaintiffs/employees), or else allow defendants/employers to recover their fees only if the action was brought in bad faith.  [See Lab. Code § 218.5(a) (“In any action brought for the nonpayment of wages, fringe benefits, or health and welfare or pension fund contributions, the court shall award reasonable attorney’s fees and costs to the prevailing party if any party to the action requests attorney’s fees and costs upon the initiation of the action.  However, if the prevailing party in the court action is not an employee, attorney’s fees and costs shall be awarded pursuant to this section only if the court finds that the employee brought the court action in bad faith”) (emphasis added); Lab. Code § 226(e)(1) (“An employee suffering injury as a result of a knowing and intentional failure by an employer to comply with subdivision (a) . . . is entitled to an award of costs and reasonable attorney’s fees”) (emphasis added); Lab. Code § 1194(a) (“. . .  [A]ny employee receiving less than the legal minimum wage or the legal overtime compensation applicable to the employee is entitled to recover in a civil action the unpaid balance of the full amount of this minimum wage or overtime compensation, including interest thereon, reasonable attorney’s fees, and costs of suit”) (emphasis added).]

These employee-favoring attorneys’ fees provisions have significant impacts on 998 offers, and the penalties plaintiffs face if they reject such offers and fail to obtain a more favorable judgment.  That is because Code of Civil Procedure section 998 does not provide greater rights to attorneys’ fees than provided by the underlying statute or contract.  Section 998 instead merely expands the group of those who are treated as prevailing parties and who therefore may be entitled to attorneys’ fees as prevailing parties under the relevant statute.

Therefore, for causes of action brought under the FEHA, prevailing defendants are not entitled to post-998 offer attorneys’ fees as part of section 998 “costs” because the FEHA allows attorneys’ fees awards to prevailing defendants only if the action is found to be unreasonable, frivolous, or meritless.  [See Mangano v. Verity, Inc. (2008) 167 Cal.App.4th 944, 951 (“[S]ection 998 does not eliminate the substantive requirements for awarding attorney’s fees to a prevailing FEHA defendant”).]  The same likely applies to causes of action brought under the Labor Code as well.

However, “costs” other than attorneys’ fees (including expert witness fees) are recoverable even in actions brought under one-way fee-shifting statutes (such as the Labor Code), with the exception of FEHA causes of action, since the FEHA specifically exempts recovery of such costs unless the action was “frivolous, unreasonable, or groundless.”  [Gov. Code § 12965(b); Arave v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (2018) 19 Cal.App.5th 525, 552-556 (offer to compromise statute did not allow employer defendants to recover expert witness fees in connection with former employee’s nonfrivolous FEHA claims, even though offer exceeded award to former employee, as more specific FEHA did not allow for recovery of such fees).]  Therefore, a prevailing employer-defendant may recover certain costs other than attorneys’ fees for claims brought under the Labor Code by an employee-plaintiff who rejects a 998 offer and fails to obtain a more favorable judgment.

Receiving a 998 offer can be daunting, and parties need to seriously weigh the likelihood of success at trial or arbitration (and the likelihood of obtaining a more favorable judgment).  Rejection of a reasonable 998 offer can have disastrous financial consequences, and so 998 offers often pressure parties not willing to take that gamble to settle their claims before trial.  For employees bringing many types of employment lawsuits, however, the consequences of rejecting a 998 offer are not as severe.  Let the attorneys at Eskridge Law evaluate the strength of your case and help you decide whether to proceed to trial or accept a 998 offer.

For further information on this topic, please see the Eskridge Law website at eskridge.hv-dev.com.

This article is based on the law as of the date posted at the top of the article.  This article does not constitute the provision of legal advice, and does not by itself create an attorney-client relationship with Eskridge Law.