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New Legislation Limits Tax Deductibility and Confidentiality of Sexual Harassment Settlements
Jan 5, 2018

New Legislation Limits Tax Deductibility and Confidentiality of Sexual Harassment Settlements

Topics: New Laws & Legislation

In addition to fueling the filing of more sexual harassment lawsuits across the country, the recent sexual harassment scandals involving high-powered public figures have led to legislative efforts to prevent settlements of sexual harassment suits from being “confidential,” and to disallow individuals or entities from taking tax deductions for attorneys’ fees and/or settlements related to such claims.  This will have the perhaps unintended consequence of hampering settlement of these cases and instead fueling continued costly litigation in courts whose dockets are already overburdened (particularly in California).

Recent Amendment to Federal Tax Code

As part of the tax bill recently passed by Congress and signed into law,  Section 162 of the Internal Revenue Code, which pertains to “ordinary and necessary” business expenses that may be deducted from income, now provides:

(q) 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.

Dubbed as the “Harvey Weinstein Tax,” (even though it isn’t a tax), this provision essentially means that the amount of any settlement of a sexual harassment claim that is subject to a confidentiality agreement, and/or the attorneys’ fees incurred in connection with the case, may not be deducted from income on a business’ tax return.  This may have significant consequences for employers entering into settlement agreements in sexual harassment cases because such settlement agreements very commonly contain confidentiality provisions.  And, contrary to public sentiment of late, confidential settlements of harassment cases (just like any other cases) are not a bad thing.  Believe it or not, not all claims of harassment are brought in good faith and not all claims have legal merit.  However, given the exorbitant cost of litigation, it is often economical to settle these cases rather than litigating them through trial.  Including a confidentiality provision in a settlement agreement provides some protection against the “domino effect” that might otherwise occur if a settling employee was free to tell a bunch of coworkers that he or she received a payout.  If employers are not able to include a confidentiality provision in a settlement agreement, this greatly hampers the possibility of settlement, and this is not particularly beneficial to anyone.

California’s SB 820

Along similar lines, legislation was introduced this week before the California Legislature to prohibit confidentiality provisions in settlements agreements concerning sexual harassment and gender discrimination claims.  SB 820 (Leyva) seeks to prohibit provisions in settlement agreements that prevent the disclosure of factual information related to the claims in any lawsuit alleging sexual assault, sexual harassment, gender discrimination, failure to prevent sexual harassment or gender discrimination, or retaliation for reporting sexual harassment or gender discrimination.  The bill would allow the inclusion of a non-disclosure provision only if requested by the alleged victim.  The bill also would allow a limited non-disclosure provision that prevents the parties from disclosing only the amount of the settlement. 

SB 820 is newly introduced, and is far from being passed or signed into law in California.  However, this effort, like the changes to the federal tax code, are not good news for employers.

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