A Capehart Scatchard Blog

How Tax Reform May Impact Sexual Harassment Lawsuits

By on January 10, 2018 in Legislation with 0 Comments

It is no secret that sexual harassment and the prevention of same in the workplace has become an increasingly popular topic. In response, businesses have started to take a closer look at their anti-harassment policies and how they are enforced.  Interestingly, lawmakers have also become focused on this issue and have now included a provision regarding sexual harassment settlements in the 2018 tax reform law.

Previously, settlements and legal fees were almost always tax deductible by businesses.  The 2018 tax reform legislation includes a provision that states that any settlement for sexual harassment claims, which contains a confidentiality or non-disclosure provision, will not be tax deductible.  Moreover, any legal fees related to the settlement of a harassment suit, where a confidentiality provision is included in the settlement agreement, will also be excluded from any type of tax deduction.

So what is the purpose behind this new rule? It seems to be to discourage the use of confidentiality clauses in sexual harassment settlements. Rumor has it that many powerful people in the entertainment industry, including Harvey Weinstein, have settled various sexual harassment claims over the years but these settlements have not been made public due to confidentiality provisions.  Are confidentiality provisions another way for perpetrators to hide their bad acts so they can continue acting inappropriately? Lawmakers think so.  Lawmakers hope that this new tax provision will make sexual harassment settlements more public, which will incentivize businesses to take a harsher stance on sexual harassment in the workplace.

Although this new tax provision seems like a good idea, it could create problematic consequences.  It’s possible that this provision will discourage settlements of sexual harassment cases, despite the strong public policy favoring settlements.  A business may be more inclined to go forward with trial because payment of litigation costs, attorney’s fees and judgments resulting from trial will be tax deductible. It’s also possible that this new provision will incentivize businesses to lower their settlement offers to offset the fact that the settlement fee will not be tax deductible.

Moreover, the language of the tax reform provision brings about many questions. Does this provision only apply to claims where sexual harassment is the sole complaint? What if an employee files a claim for sexual harassment but also includes claims of discrimination and retaliation? Would a settlement of those claims, with a confidentiality provision, preclude a tax deduction?  Will there need to be proof that the sexual harassment actually occurred before any settlement can be entered into in order to determine tax consequences? Will plaintiffs in a sexual harassment suit be able to take tax deductions for legal fees he/she paid if a confidentiality provision is included in a settlement? The answers to these questions are not yet clear.

As this new tax provision is put into practice, it will be interesting to see what impact it has, if any, on sexual harassment in the workplace. The hope is that making it costlier to hide sexual harassment might make it less common in the workplace.


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