Tax Bill Bars Companies From Deducting Payments in Sex Harassment Settlements Where Agreement Is Subject to a Nondisclosure Agreement

    The Tax Cuts and Jobs Act of 2017 (the “Tax Bill”), which President Trump signed into law on December 22, 2017, eliminates companies’ ability to deduct settlement payments in sexual harassment cases, where such payments are subject to non-disclosure clauses (“NDAs”). Under the extremely broad provision, “No deduction shall be allowed” for “(1) any settlement or provision 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.”[1] The prohibition applies to amounts “paid or incurred” after December 22, 2017, meaning that companies currently negotiating sexual harassment claims are affected.

    The Internal Revenue Code has provided no guidance as to how it will interpret and enforce the provision. Until such guidance is issued, employers who are negotiating settlements of sexual harassment claims will need to carefully weigh the benefits of confidentiality vs. the value of deducting settlement payments, and will want to consult with their employment and tax attorneys as to whether (1) the Tax Bill’s deduction prohibition applies in any given case, and (2) the parties may lawfully avoid the consequences of the Tax Bill by, among other things, negotiating carefully-worded non-disparagement clauses. Employers should also be prepared to respond to plaintiffs’ hardline efforts to exclude NDAs in agreements.

[1] Tax Cuts and Jobs Act of 2017, § 13307. Although the provision was intended to “target sexual predators or their companies who could use sexual misconduct settlements as tax write-offs,” the consequence will be to punish both companies and purported victims who have reached an agreement to resolve claims. Ryan Sit, Republican Tax Bill Will Hurt Sexual Harassment Victims, Experts Say, Newsweek (Dec. 20, 2017), http://www.newsweek.com/tax-bill-metoo-sexual-harassment-deduction-hush-money-754322. This is because the provision, on its face, prevents sexual harassment victims from deducting the portion of settlement payments that are given to their attorneys as fees. See Anthony C. Infanti, Why are Republicans punishing sexual harassment victims in the tax bill?, The Hill (Dec. 19, 2017), http://thehill.com/opinion/finance/365592-why-are-republicans-punishing-sexual-harassment-victims-in-the-tax-bill.