The coincidental timing of the #MeToo movement and the negotiation of a major tax bill in late 2017 resulted in a small but important change to the federal tax code. A few sentences added very late in the negotiations of the tax bill last year are causing a dramatic shift in how employers are settling sexual harassment complaints.
Before the change, there had been two givens when an employer was resolving a sexual harassment claim. First, any settlement payment would be a deductible business expense. Second, virtually all settlement agreements would include a confidentiality provision precluding the claimant from disclosing the settlement and the circumstances surrounding the complaint.
These “hush” clauses have been the subject of much public criticism and commentary since Harvey Weinstein, Bill O’Reilly and others in the public eye were accused of serious acts of sexual harassment. There is a view that if the employers involved had faced public scrutiny early on for the conduct of their executives, the employers would have taken much more decisive action to prevent further harassment. The federal tax code might not seem the likely place that politicians would turn to take up this issue. But the quickly-changed tax code in 2017 has made it much more expensive for employers if they seek to keep a settlement of a sexual harassment claim confidential.
Section 162 of the federal tax code generally lists business expenses that are tax deductible. The 2017 tax bill adds a new § 162(q) which was effective December 22, 2017 and provides:
(q) PAYMENTS RELATED TO SEXUAL HARASSMENT AND SEXUAL ABUSE.– 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.
Simple enough, right? Not so for attorneys who represent employers and employees attempting to settle sexual harassment-related