New Tax Legislation Affects Confidential Sexual Harassment Settlements

Dec. 27, 2017

New Tax Legislation Affects Confidential Sexual Harassment Settlements

The recent explosion of high profile sexual harassment allegations and the confidential settlements reached by the likes of Harvey Weinstein and Bill O’Reilly influenced one provision of the new comprehensive tax bill signed into law last week. Section 13307 of the tax bill provides that settlements and attorney fees paid in connection with sexual harassment or sex abuse cases no longer will be deductible if the settlement includes a requirement that the fact or terms of the agreements are to remain confidential.

What Section 13307 Does

Section 13307 amends Section 162 of the Internal Revenue Code adding the following exception for business expenses deductions for settlements and related fees:

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.

The purpose of the deductibility exception apparently is to promote transparency regarding such settlements and to ensure that serial harassers can be exposed.

The effect, however, could be to discourage settlement of such claims, especially in those cases where the employer contests the validity of the harassment allegations.

Public Policy Favors Settlement; Section 13307 Does the Opposite.

Like many lawsuits, sexual harassment cases often can be resolved for a fraction of what it would cost the employer to defend the case. However, the employer and/or the alleged harasser may believe that the allegations are false or exaggerated versions of incidents, communications or relationships. The employee, for her (or his) part, may strongly believe that they were treated poorly and are entitled to a remedy.

In such cases, the employer and the alleged harasser may be willing to settle, but the last thing they want to do is pay a former employee to settle a sexual harassment case only to have the employee broadcast those allegations after the settlement. If that is to be the outcome, they might prefer to defend the case in the hopes of vindication at trial or on a motion to get the case dismissed.

Also, there are many cases where the victim is concerned about her own reputation and would prefer to resolve the claim quietly and discreetly.

Moreover, it seems strange that if the goal really is to prohibit bullish and oppressive behavior in the workplace, filing a Section 13307 only to confidential settlements of sexual harassment and sex abuse cases. It does not apply to racial harassment claims, disability harassment claims, national origin or whistleblower claims (which sometimes include allegations of various forms of harassment). Should not the public policy justifying Section 13307 apply to these groups, as well?

The Sky Is Not Falling

Some commentators are saying that elimination of the deduction for confidential settlements financially penalizes victims of harassment, that it applies not only to employer deductions, but would also prevent the victim of the harassment from deducting her own attorney’s fees. This is hogwash. An employee’s attorney’s fees and costs for claims against an employer are deductible “above-the-line” under section 62(a)(20) of the Code. Section 13307 amends section 162 of the Internal Revenue Code, not section 62. Employee attorney’s fees remain deductible.

Lesson Learned

Add this to the risk calculus to an undisciplined workplace. As in all things employee related, communication is the key in both of the prevention and mitigation of the scourge of workplace harassment.


Written By:
Bill Egan

Bill Egan is a Seasoned Employment Law Attorney backed by over 33 years of proven, veteran experience. He specializes in navigating businesses through conflict resolution in the workplace.

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