Jim Brown

Nicholas J. Ferraro

One of the primary concerns addressed through the #MeToo movement is that claims of sexual harassment in the workplace are often settled discreetly and without scrutiny. For years, employers have resolved sexual harassment claims with a settlement payout in exchange for a general release of the company from all liability. The terms of the settlement would include a confidentiality or nondisclosure clause barring the employee from discussing the allegations or the settlement with others.

In particularly egregious circumstances, this creates a culture of secrecy in which employees are kept in the dark about a supervisor’s, owner’s, or some other individual’s past indiscretions. The recently enacted Tax Cuts and Jobs Act (TCJA) encourages employers not to cloak settlements with a nondisclosure or confidentiality clause.

Deduction Narrowed for Sexual Harassment Payments

Congress took note of the #MeToo movement in its sweeping changes to the tax code last year. The TCJA, which largely took effect on January 1, 2018, has eliminated businesses’ ability to deduct from their taxable income any settlement payments and attorneys’ fees related to a claim for sexual harassment or sexual abuse if the settlement is subject to a nondisclosure or confidentiality clause. … Without the benefit of regulations or rulings from the IRS, employers must choose between keeping such settlements confidential without a tax benefit or deducting the settlement and related attorneys’ fees as business expenses. …

Bottom Line

Tax-efficient resolution of the claims is always a major factor in settlement negotiations. The TCJA imposes an additional consideration: whether to settle sexual harassment or sexual abuse claims with a confidentiality clause or deduct the payment and fees at tax time.

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