In general, legal fees for unlawful discrimination are still tax deductible, and they are a special "above the line" deduction you can take even if you don't itemize. Normally, I would expect you to be taxed as if you received the entire settlement, and then paid the attorneys yourself, then you would deduct the legal fees. So I think the payer is probably wrong to issue separate 1099s.
However, because they did that, I would only report the W-2 and 1099s you got as income, and not deduct any legal fees. They made it easier for you, although it may not be technically correct.
