The Tax Cuts and Jobs Act, signed into law last year on December 22, includes several provisions that directly affect how employers will deal with sexual harassment claims going forward.
The Act has a provision that eliminates the ability of employers to deduct, as a business expense, settlement or attorneys' fees associated with settling claims of sexual harassment or sexual abuse if the settlement agreement contains a confidentiality provision or a nondisclosure provision. This provision is an attempt to require transparency of settlement agreements concerning sexual harassment and sexual abuse. Since confidentiality and non-disclosure provisions are almost always part of a settlement, this provision could have far reaching implications for employers and employees alike.
The relevant provision of the Act is Section 13307, entitled "Denial of Deduction for Settlements Subject to Nondisclosure Agreements Paid in Connection With Sexual Harassment tor Sexual Abuse Act." Specifically, the Act in Section 13307 amends Section 162 (q) and prohibits a tax deduction for "(1) any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement, or (2) attorneys' fees related to such a settlement or payment." The Act does not define "sexual harassment" or "sexual abuse" nor does it differentiate between employee and employer.
Section 13307 may affect employees as they make a decision on whether to accept a settlement. For example, the Act provides that the attorneys' fees from such settlements will no longer be tax deductible. The failure of the Act to differentiate between employee and employer may result in an employee who settles a claim and is then taxed not only on the monies he or she receives, but also the monies paid to his or her attorneys as part of a settlement.
The provision affects settlements paid or incurred after December 22, 2017.
Comment: Based on the clear language of Section 13307, employers will no longer be able to deduct payments as a business expense that are made to settle sexual harassment claims when the settlement agreement is executed with a confidentiality provision. Practically, employers can still insist on confidentially provisions in their settlement agreements as the Act does not prohibit them. However, by taking away the tax deduction, those settlements could be more expensive to employers. Moreover, the potential negative tax consequences that employees may have from being taxed on the full amount of the settlement (as opposed to the amount they receive) may make employees less likely to settle or make them demand more to settle claims with confidentiality provisions. One thing is for certain, the #MeToo movement has come to the tax code and employers should consult with their employment attorneys to evaluate the effect of the Act on valuation and settlement of sexual abuse and harassment claims.
For more information please contact Julie Kinkopf, at firstname.lastname@example.org or 215.972.7914.