While the Tax Cuts and Jobs Act (“the Act”), signed into law today, has received considerable media coverage, a provision included in the Act that affects the ability of employers to deduct settlement payments and attorney’s fees for claims involving sexual assault or sexual harassment has received little attention. Nonetheless, this provision will have a significant impact on how employers resolve claims of sexual harassment and sexual abuse. Specifically, the Act provides that any settlement or payment related to claims of sexual harassment or sexual abuse may not be deducted as a business expense if the payments are subject to a nondisclosure agreement. The Act also provides that any attorney’s fees incurred related to such a settlement with a nondisclosure agreement may not be deducted. The new law applies to “any settlement or payment related claims of sexual harassment or sexual abuse” whether or not a lawsuit has actually been filed. Importantly, these provisions are effective immediately, and thus all payments made after the effective date of the Act in connection with the settlement of a sexual harassment or a sexual assault claim are subject to these new provisions. Read literally, the new law precludes employers from deducting the amounts of such settlements for payments made after the effective date of the Act even if a settlement agreement with a nondisclosure provision was entered into prior to the effective date.
Historically, employers have deducted as business expenses amounts paid to settle claims of sexual harassment and sex abuse and the attorney’s fees related thereto, and employees who received such payments were able to deduct the portion of the settlement paid to their attorneys as legal fees. Now, when settling claims of sexual harassment and sex abuse, employers will need to weigh the desire for confidentiality versus the ability to deduct the settlement and related fees as business expenses, and employees will need to balance their desire for confidentiality against their ability to deduct their attorney’s fees from the taxable settlement amount.
It is important to note that the Tax Act only applies to settlements of claims of sexual harassment or sex abuse, not claims of gender discrimination or any other type of harassment or discrimination. Employers contemplating entering into negotiations to resolve claims of sexual harassment or sex assault should be mindful of these new provisions and discuss their implications with counsel.
If you have any questions regarding this blog, please feel free to contact an attorney in the Gibbons Employment & Labor Law Department.