Several high-profile cases of sexual harassment have come to the public’s attention over the last several months. These high-profile cases and the so called “Me Too” movement have pushed forward the public discourse on the existence of sexual harassment in the workplace, the appropriate way to respond to complaints of sexual harassment, and whether confidentiality provisions have a place in sexual harassment settlement agreements.
In response this debate and public outcry, legislators have taken aim at confidentiality provisions in settlement agreements of harassment claims. When Congress passed its tax bill at the end of 2017, it modified section 162(q) of the Internal Revenue Code to state:
“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.”
As such, payments made to settle sexual harassment claims as well as attorneys’ fees paid to defend said claims are no longer business expenses that can be deducted from an employer’s business tax return.*
Additionally, the California state Senate has introduced legislation restricting confidentiality provisions in settlement agreements that prohibit the disclosure of factual information related to allegations of sexual assault, sexual harassment, gender discrimination, failure to prevent sexual harassment or gender discrimination, and retaliation for reporting sexual harassment or gender discrimination. The proposed legislation would allow for the inclusion of a non-disclosure provision only if it was requested by the alleged victim. Furthermore, the legislation would allow for limited non-disclosure provisions regarding the amount of the settlement.
Many individuals have speculated about the impact that this legislation will have. Proponents of the legislation, believe that it will help reduce sexual harassment claims, because victims will be able to speak publically about the harassment, and companies will not be able to avoid addressing allegations. Many opponents of the new law believe that it will actually discourage settlement, because employers will have less incentive to advance an early resolution of sexual harassment claims. Opponents also speculate that the law will encourage more litigation because victims’ stories may encourage others to come forward with their own lawsuits. Only time will tell the broader impact of the tax and other proposed legislation. In the meantime, the new law will surely impact some employers' deliberations regarding whether to settle a case.
*This post should not be considered tax advice. Please consult a tax professional regarding your personal situation and the tax implications of this law.