Tax Cuts and Jobs Act Surprise: “Time’s Up” on Confidential Settlement of Sexual Harassment Claims?
ISSUE: Hidden among the many new provisions passed by the Tax Cuts and Jobs Act is a little-publicized provision that appears to be a direct response to recent news regarding high-profile settlement of sexual harassment claims, both in the public and private sectors. Previously, settlement payments and attorneys’ fees arising out of an employment dispute were deductible as business expenses under Section 162 of the Internal Revenue Code. A new provision contained in the new tax law now prohibits these types of deductions if 1) they are related to the settlement of sexual harassment or sexual abuse claims; and 2) that settlement is subject to a non-disclosure agreement.
The new provision leaves open several questions about how broadly the provision applies to settlements of claims “related to” sexual harassment and/or abuse. For example, it does not address the possibility that employees may allege sexual harassment claims ancillary to other, unrelated claims, such as race or gender discrimination claims, and the extent to which settlement payments under such a situation could be deducted. It is also unclear whether the provision would prohibit the deduction of settlements containing a general release of all claims (including any claims of sexual harassment or abuse) even if the employee’s claim was unrelated to sexual harassment or abuse. Finally, a question still remains whether attorneys’ fees incurred prior to settlement (e.g., for investigating and responding to a sexual harassment complaint) should be treated as “arising out of an employment dispute” and therefore would not be deductible under the new tax provision if the ultimate settlement includes a non-disclosure agreement.
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IMPACT:
Employers should be aware of this new tax provision as they handle employee claims moving forward and be prepared to weigh the desirability of deducting payments made for settlement of sexual harassment claims with the utility of keeping such claims strictly confidential.
For more information on managing specific terms of employment agreements, please contact your local Quarles & Brady attorney or
- Otto Immel: (239) 659-5041 / otto.immel@quarles.com