I agree that the amount should be entered in box 3 rather than box 7. If you can't get them to issue a corrected 1099 then attach an explanation with your tax return and report the income on line 21 of Form 1040. If you were including the total settlement of $40,000 on your return and the settlement was related to unlawful discrimination then you could take the legal fees as an adjustment to income on line 36. However, since they are not reporting the entire settlement, deducting the legal fees would not be prudent. The following links discuss these issues in detail.
See page 29 - http://www.irs.gov/pub/irs-pdf/p525.pdf
Based on the forms (1099 & W-2) that you have received, you will be reporting everything but the attorney's fees (I assume there is nothing in box 14). If you report the entire $40,000 instead and then take the adjustment on line 36 for the attorney's fees (assuming the fees were for unlawful discrimination), your AGI will be the same in both circumstances. However, the amounts on your return will not match up with the information that the IRS receives on the 1099 and W-2 which could result in questions from the IRS. Perhaps the company will change some of the information in the other boxes when you inquire about box 3.
Below are the 1099-MISC instructions which I am sure you have already looked at: