In recent months, headline after headline has featured a new allegation of sexual harassment against a prominent figure in the business or entertainment world. The recent publicity surrounding workplace sexual harassment claims has brought to light the surprising detail that settlements and legal fees are almost always tax deductible by the businesses involved. On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act of 2017 (the “Act”), which includes a provision limiting the tax deductibility of sexual harassment settlements and related attorneys’ fees if a sexual harassment settlement agreement contains a nondisclosure agreement.
The new tax code provision (Section 162(q)) reads: “PAYMENTS RELATED TO SEXUAL HARASSMENT AND SEXUAL ABUSE. – No deduction shall be allowed under this chapter 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) attorney’s fees related to such a settlement or payment.”
Until Section 162(q) was passed, employers could generally settle a case, require nondisclosure, and deduct both the settlement amount and their attorneys’ fees paid in defense of the action. Now, employers (and arguably plaintiffs) cannot deduct those amounts in the event the settlement agreement contains a nondisclosure provision.
There are many ambiguities in the new law that will have to be sorted out, such as when a settlement for multiple claims qualifies as a “sexual harassment” settlement or whether the bar on deducting attorneys’ fees applies to all attorneys’ fees or only those directly related to settlement. But despite these ambiguities, the lesson for employers is that, when confidentiality is important, the cost of settling a sexual harassment claim will be higher than before.
The most obvious way to avoid these extra costs is to prevent sexual harassment claims from occurring in the first place. Employers are advised to have bona fide sexual harassment policies in place and to provide in-person sexual harassment training to all employees. This is especially important for upper-level employees to whom nondisclosure may be the most crucial term of any settlement.
If an employer has a question regarding the new law or with regard to sexual harassment policies or training, they are encouraged to contact any of the attorneys in Fennemore Craig’s Labor and Employment Practice Group.