Hi and welcome to our site!First of all - let understand WHY the IRS "thinks" that settlement is subject of self-employment taxes. That is based on HOW that payment was reported to the IRS.If it was reported in box 7 as non-employee compensation - that is what triggers self-employment tax issues.
Box 3 of Form 1099-MISC is used to report other income that is not reportable in one of the other boxes on the form. Generally, all punitive damages (even if they relate to physical injury or physical sickness), any damages for non-physical injuries or sickness, liquidated damages received under the Age Discrimination in Employment Act of 1967, and any other taxable damages are required to be reported in Box 3. Generally, all compensatory damages for non-physical injuries or sickness (for example, emotional distress) arising from employment discrimination or defamation are reportable in Box 3. However, if a taxpayer receives an award of back pay that constitutes wages, it generally would be reportable on Form W-2, not Form 1099MISC.
So to conclude - because you was not in business and that compensation is NOT your business income - it is NOT subject of self-employment tax, however.If that amount represents a "severance pay" - which is considered wages - it is subject of employment tax - partly paid by your employer and partly by you - in this case your employer must report the settlement amount on W2 not on 1099MISC, But if that amount amount does not represent wages - but damages ( including punitive damages) resulted from improper actions of your employer - neither self-employment nor employment taxes are due - and in this case the payment is reported in box 3 form 1099MISC.See for reference - http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Lawsuits,-Awards,-and-Settlements-Audit-Techniques-Guide