Just like the infamous line that Congress had to pass the Affordable Care Act to know what was in it, it seems we had to pass the new tax law to find out all of the hidden surprises. One item that received little publicity was an addition to the Internal Revenue Code that now prohibits a business from taking a deduction of a settlement for a sexual harassment suit if the settlement contains a confidentiality provision: “No deduction shall be allowed … 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) attorneys’ fees related to such a settlement or payment.”
This provision had little discussion in the legislative process and appears to be a knee-jerk response to the “#Metoo” movement and recent publicity involving high profile sexual harassment cases. Unanswered questions include how attorneys’ fees related to the defense of a sexual harassment case will be treated for tax purposes, and whether a company can structure a settlement to separate out the sexual harassment claims if a plaintiff sues under multiple theories. For example, if a plaintiff sues for sexual harassment and wrongful discharge, could the company settle the sexual harassment claim for one dollar without confidentiality, then execute a separate agreement on the remaining claim with a full confidentiality clause protecting the bulk of the settlement amount?
No doubt, plaintiffs’ lawyers are already jumping on the bandwagon and pushing sexual harassment cases in the wake of the recent publicity. This law will provide even more leverage because the company will now have to decide whether it wants to risk losing the deduction as a business expense for the litigation fees and settlement of a claim, versus allowing a plaintiff to publicize a settlement (which could encourage more litigation). Neither of those options are good choices for employers.