New Tax Law Makes it More Expensive for Employers to Quietly Settle Sexual Harassment Claims

Sexual Harassment
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Before we begin, here’s the legal fine print. I am not a tax law professional or advisor. What follows is not meant as specific tax advice for you (even if you are a client of my firm). This post is meant to discuss potential tax issues if you are a company settling a sexual harassment claim. To know how this will affect you or your company personally, I recommend that you see your friendly neighborhood tax lawyer or accountant.

When a company is accused of being responsible for the illegal conduct of one of its employees against another, a settlement is the common result. For example, the employee who claims she was a victim of sexual harassment may agree settle her claim by agreeing not to pursue legal action in return for compensation, usually a cash payment.

Whether this is the “right” thing to do may be up to debate, but it’s easy to understand why it happens. The employer can avoid the risk of a large financial judgment entered against it, as well as the bad publicity that is sure to follow the lawsuit. The employee gets to avoid the possibility of losing her lawsuit, yet receives money to compensate her for the wrongful behavior she had to endure.

But one potentially troubling element often present in these types of settlements is the confidentiality clause or nondisclosure agreement.

What Is a Nondisclosure Agreement?

A nondisclosure agreement is exactly what it sounds like – it’s an agreement where parties agree not to disclosure certain information. In the context of a sexual harassment settlement, the nondisclosure agreement will prohibit the employee from talking about the sexual harassment with anyone. In some cases, the employee may be prohibited from even acknowledging the existence of the nondisclosure agreement.

When examined narrowly, this doesn’t sound like a big deal. In fact, the employee may not think twice about it because she’s ready to move on, wants to forget what happened to her and if given a choice, would refuse to ever talk about the sexual harassment again.

But from the perspective of society as a whole, there are some who think this is a bad thing. After all, it allows sexual predators in the workplace to continue finding victims over and over again because earlier victims can’t warn potential victims (does Harvey Weinstein come to mind, anyone?). To address this concern, a particular provision was added to the new tax bill that Congress passed late last year.

The Tax Cuts and Jobs Act

Specifically, § 13307(a) of the Tax Cuts and Jobs Act states that any payment of money to settle a claim of sexual harassment or sexual abuse is no longer tax deductible as a business expense if the settlement is subject a nondisclosure agreement. Additionally, the legal fees incurred to obtain the settlement are not tax deductible either. There are three potential reactions to this new law.

The first reaction is likely one of surprise that a business used to be able to take a tax deduction for settling a sexual harassment claim. It’s hard to say what’s more unnerving: that a business used to get a tax benefit when it settled an allegation of sexual harassment or that the federal government would view settling a sexual harassment claim as the cost of carrying on a trade or business.

The second reaction is that at the very least, it becomes more expensive for a business to settle a sexual harassment claim and keep it quiet. Maybe this will be further motivation for employers to prevent sexual harassment from taking place in the first place.

Finally, there is fear that this new tax law may make it harder for victims of sexual harassment to obtain a settlement and instead, force them to go to court. One of the major reasons for settling a sexual harassment claim is to avoid the publicity. But with it becoming more expensive to have a nondisclosure agreement in a sexual harassment settlement, it might encourage employers to forego settling claims and take their chances in court. This shouldn’t happen, since nondisclosure agreements can still be used to settle sexual harassment claims (albeit at a slightly higher cost), but theoretically, the potential is there.

To learn more about nondisclosure agreements in sexual harassment cases, you can read our other blog post aptly titled, “Nondisclosure Agreements: What Are They, and How Do They Work in Sexual Harassment Cases?

Summing It Up

– The Tax Cuts and Jobs Act prevents employers from taking a tax deduction for the costs relating to a sexual harassment claim settlement, including the payout and associated legal fees.
– This loss of a tax deduction only applies if a nondisclosure agreement is included in the settlement.

For More Information

If you’re being asked to sign a nondisclosure agreement as a condition of receiving a settlement concerning your allegations of sexual harassment, please contact us for a no cost online review of your case.

But if you’re not ready for that step yet, check out our Resources Page, where you will find numerous other no-cost resources like our Case Assessment Calculator as well as our ebook, Employment Law Guide for Women and accompanying e-course.