On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act, with the goal of completely revamping the tax code. In addition to changing many basic facets of tax law, the bill also includes a provision in keeping with the times: a “Harvey Weinstein” provision intended to use tax policy to root out and eliminate sexual harassment in the workplace.
Employers should be aware of the wide-reaching implications of the “Harvey Weinstein” provision, inspired by the “#MeToo” movement sweeping the nation. The provision, Section 162(q), provides that “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.” In sum, the provision forces employers to choose between including a nondisclosure agreement provision in a settlement agreement or taking the cost of the settlement as an ordinary business expense deduction on its tax return. Because the provision is so new, the IRS has not yet issued any guidance on its meaning. In fact, the provision poses more questions than it provides answers.
Therefore, when handling sexual harassment claims, companies may want to consider:
- What might constitute sexual harassment under the provision, and whether sex discrimination claims might be considered sexual harassment under the tax bill.
- Whether settlement agreements unrelated to sexual harassment that include common provisions requiring employees to waive all future employment-related claims could trigger Section 162(q).
- Whether the prohibition on deduction as an ordinary business expense applies to attorneys’ fees for preparation of settlement documents or for handling of the entire matter.
Despite the lack of clarity, now may be a good time for employers to take a look at their settlement and tax allocation practices, as well as a broader review of sexual harassment training and use of nondisclosure agreements in light of this landscape.
Client Alert 2018-019