Do we pay payroll taxes to ex-employee on agreed settlement amount?

We agreed (reluctantly!) to settle a wage claim instead of dragging it out for who knows how long. The agreement is we will pay BOLI $500 a month (that they then turn around and pay the ex-employee)for eight months. They seemed to think we didn't have to pay payroll taxes on it but I'm not so sure. Do we?, and if so, how do we go about that since we are making the checks out to BOLI? Also, what does BOLI at the end of the year send the ex-employee saying they had paid her $4000 (from us) so she can report it on her taxes? Also the claim is from a prior year which I would think complicates things (amended return?)but they didn't seem to think so, and that I could treat it more like a business expense in 2011 and not like wages. Any help would be appreciated. Thanks!