Confidentiality and Sexual Harassment Settlements

Last month, while speaking before the HRCSCO, I mentioned a few provisions from the new tax law.  The Tax Cut and Jobs Act signed just before Christmas affects the deductibility as business expenses of sexual harassment settlements which are also subject to confidentiality clauses:

§ 13307. No deduction shall be allowed under this chapter [§ 162 of the IRC relating to business expenses] 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.

Effective Date.  The amendments made by this section shall apply to amounts paid or incurred after the date of the enactment of this Act.

 On its face, it was initially argued by some giant law firms that this applies to both deductions by an employer and by the employee.  Questions remain about whether this could also affect the ability of the employer to deduct legal fees paid to their own defense attorneys or just to the employee's attorney.   Could it be construed to require employees to pay taxes on the substantial fees paid to their attorney (which were formerly deductible under a different provision that has not been repealed).  However, despite the language of the statute, it was arguably not the intent to penalize the employee because it is located in the provision governing business expenses.   Maybe the IRS will not go so far as to penalize paying an employer's attorney either.  It will be interesting to see what guidance the IRS offers when it issues regulations.

 The unintended consequence of this knee-jerk reaction to the #metoo movement  may lead to creative drafting of claims and settlement agreements.  How will settlement payments be allocated between abuse/harassment and non-abuse claims?  Currently, some emotional distress claims are commonly allocated settlement amounts to minimize  wage withholding.  Employers will not pay “real” settlements if the amount will be public because it will encourage frivolous claims.  

Many victims will not want the amount of their settlement to be public either because they do not want to be the subject of gossip, etc.  for the rest of their careers.     As it is, the EEOC has always required employees to keep sexual harassment investigations as confidential as possible to protect the privacy of victims (and, hopefully, innocent accused employees).   Yet, this provision seems to turn the privacy concerns of many victims on its head even though not all of them -- or even many of them --  will receive settlements that will leave them independently wealthy.   Will victims be required to choose between privacy and their pocketbook?   

Thus, it is likely that more such cases will go to trial, making these situations more expensive, distracting, exhausting and demoralizing for both employers and victims.  When many victims would prefer to get on with their lives and put a bad situation behind them, they will now be forced to litigate cases because an employer will not pay any settlement that is more than a cost of defense, if that.  Neither side really enjoys a jury trial because it is often like flipping a coin.  

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can be changed or amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.