The Court of Appeal reversed, holding that when an employer pays an employee in settlement, the employee obtains a "net monetary recovery" and is the prevailing party under Code of Civil Procedure section 1032(a)(4). As such, where the settlement agreement is silent as to the recovery of costs, the employee is entitled to recover his or her costs as a matter of right. The employer is not entitled to recover its costs, even though it obtained a judgment denying the plaintiff any relief, which ordinarily would make the defendant the prevailing party.
The Supreme Court has affirmed that decision in full:
When a defendant pays money to a plaintiff in order to settle a case, the plaintiff obtains a "net monetary recovery," and a dismissal pursuant to such a settlement is not a dismissal "in [the defendant‘s] favor." (§ 1032(a)(4).) [T]his holding sets forth a default rule; settling parties are free to make their own arrangements regarding costs.The opinion is available here.