What Is California Labor Code §3860: Settlement Notice and Reimbursement?

Except as provided in paragraph (2), a release or settlement under this chapter, with or without suit, is not valid or binding as to any party thereto without notice to both the employer and the employee, with opportunity to the employer to recover the amount of compensation the employer has paid or become obligated to pay and any special damages to which the employer may be entitled under Section 3852, and opportunity to the employee to recover all damages the employee has suffered and with provision for determination of expenses and attorney’s fees as herein provided.

What does California Labor Code 3860 actually require?

Labor Code 3860 requires notice to both sides before a settlement takes effect, and it controls how the money gets divided.

An injured worker can sometimes pursue someone other than the employer for the same injury, such as a careless driver or a property owner. California Labor Code 3852 preserves that right. Labor Code 3860 steps in once a deal is reached. It says the deal has no legal effect until both sides receive notice, with a fair chance for each one to recover what the law allows. From there, it decides the payout order: costs and fees first, then the amount owed to the employer.

The rule covers a worker who settles with an outside party while a workers compensation case is open or already paid, whether or not a lawsuit was ever filed. It covers the employer or its insurer that paid or owes benefits for the same injury too. Since January 1, 2026, a special one-third cap also applies when the injured worker is a peace officer or a firefighter.

How does Labor Code 3860 divide a settlement?

Costs and attorney fees come out first, then what the employer can recover, then the rest goes to the worker.

Labor Code 3860 does not let the employer take everything. Reasonable costs and a reasonable attorney fee come out first. Who earns that fee depends on whose attorney reached the deal: the worker's attorney, the employer's attorney, or both when each side has its own counsel. After that deduction, the employer or its insurer gets paid back for the benefits it covered, plus any special damages it may claim under Section 3852. The table below lays out that order.

Labor Code 3860 leaves the exact dollar figure for costs and fees to be set case by case. There is no fixed percentage for either one.

Does a different rule protect peace officers and firefighters?

Yes. Since January 1, 2026, the employer cannot keep more than one third of the third party's insurance limits in a covered case.

A 2026 change wrote this protection directly into Labor Code 3860. Section 3852 limits this group to someone employed by a city, county, city and county, or fire protection district, and the cap only applies when two things are both true: the worker's damages are worth more than what remains once the employer is paid back, and the insurance available is not enough to pay the employer and the worker in full. Once those conditions are met, the deal has no legal effect unless it caps the employer at one third of the available insurance limits, and the employer gets no credit or offset against the worker's future workers compensation benefits because of it. That cap applies even if the benefits already paid were worth more than the one-third share.

How does Labor Code 3860 connect to other third-party sections?

Section 3852 creates the right to sue or settle, Section 3860 governs a settlement, and Section 3856 governs money a court awards after a trial.

California Labor Code 3852 is the starting point. It keeps the worker's right to pursue a third party even while a workers compensation claim stays open. Labor Code 3860 then governs what happens once that claim ends in a settlement, whether or not a lawsuit was ever filed. California Labor Code 3856 covers a related but separate situation: money a court awards after a case goes all the way to trial and judgment. The two statutes share a similar payment order, but 3860 is the one that governs a settlement and the notice that has to happen first. A separate law, Section 3859, adds its own rule: a deal like this generally needs the written consent of each side. Our guide to third-party work injury claims walks through how these pieces fit together in a real case.

What should a worker save or ask about this settlement?

Save every notice, lien letter, and settlement paper, and ask who is deducting fees and how the repayment figure was calculated.

Keep the notice the employer or insurer sends about its claim, any letter listing benefits paid, and the signed settlement agreement. Ask the adjuster or the attorney handling the civil case for a written breakdown of the amount claimed before signing anything. When no court is deciding the matter, the workers compensation appeals board sets the costs and fees instead. A worker whose own benefits were delayed or denied while the outside case moved forward should also look at what to do about a stalled or denied workers compensation claim, since both matters can need attention at the same time.

A settlement with an outside party and a workers compensation claim often move on separate tracks at the same time. Questions about the notice rule, the payment order, or the one-third cap are easiest to answer with the claim file and the settlement paperwork in hand. Eman Yazdchi reviews each matter individually. To talk about a specific claim, call (661) 273-1780 or use the contact form.