Effect of the New Tax Law on Confidential Sexual Harassment Settlements
Sec. 13307 of the new tax law limits the ability of employers to deduct settlement payments of sexual harassment claims and the ability of employers and employees to deduct their attorneys' fees in connection with settlement agreements of sexual harassment claims that have confidentiality clauses.
New Tax LawSection 13307 of the new federal tax law overhaul provides that if a settlement agreement of a sexual harassment or sexual abuse claim contains a confidentiality clause or non-disclosure provision, the settlement payment and related attorneys' fees may not be taken as tax deductions.
Purpose and PolicyThe intent of the new law is to discourage employers and other parties from requiring employees and other victims of sexual harassment or sexual abuse to sign strict confidentiality and non-disclosure clauses as a condition of receiving a settlement payment. In view of the recent movement of numerous alleged sexual harassment victims coming forward, the new law is designed to create a tax incentive for employers to not require confidentiality. Without confidentiality, alleged harassers could not pay victims off in order to hide their harassment or shield their conduct from scrutiny. That way, future potential victims may be protected.
Adverse ConsequencesHowever, it is likely that employers will still insist on confidentiality clauses in settlement agreements of sexual harassment claims, despite the new tax law. And instead of its desired effect, section 13307 may result in smaller settlements for victims of workplace sexual harassment as employers factor in the cost of the lost tax deductions. In addition, section 13307 provides that attorneys' fees may not be deducted in connection with confidential settlements of sexual harassment claims. To the extent that this is construed to apply to the attorneys' fees incurred by employees, this may create a harsh result for employees, who previously were able to deduct their attorneys' contingency fees (usually 1/3 of the overall settlement amount) to avoid being taxed on their attorneys' fees (double taxation). Consequently, employees likely will demand larger settlements of sexual harassment claims as employees factor in the higher taxes they may pay and the lower amounts they may net. With employees demanding more and employers wanting to pay less, both as a result of the potential adverse tax consequences, it may become more challenging for employment lawyers to negotiate settlements of sexual harassment cases.
Other IssuesSexual harassment claims are often mixed with other types of employment law claims, such as retaliation, discrimination and more. What if a settlement includes a sexual harassment claim along with several other employment law claims that are not covered by section 13307's limitation on deductions? Unless Congress amends or repeals section 13307, or employers throw out confidentiality clauses, employment lawyers and tax attorneys will have to work hard to develop best practices to deal with these new complexities.