Employment Counseling and Litigation

A New Hidden Cost of Sexual Harassment Claims

An item that received virtually no attention in the new tax law was an addition to the Internal Revenue Code that now prohibits businesses from taking a deduction for settlement of a sexual harassment suit if the settlement contains a confidentiality provision.  Most settlements have such a provision.

The new law states: “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.”  I’m no tax guy, although we have several good ones at ThompsonMcMullan, but even I can figure out that the hidden costs of a settlement just went up.

This provision, perhaps, was a response to the recent “#metoo” movement.  An unanswered question in my mind is whether a company can structure a settlement to separate sexual harassment claims from other claims.  So, for example, if a claimant sues for both sexual harassment and wrongful discharge, could the company settle the sexual harassment claim for a negligible amount without confidentiality, and then execute a separate agreement on the discharge claim with full confidentiality to protect the larger settlement amount paid for that claim?  Would that be a sufficient protection for the company?

Plaintiffs’ lawyers are starting to push sexual harassment cases, which had seen some decline in recent years, in the wake of the recent publicity.  This change in the law complicates things. The company may have to decide whether it wants to risk losing the deductions for the settlement of a claim, which may be necessary in many cases, or allow a plaintiff to publicize a settlement.  Neither option seems like a good one.