No More Deductions For Confidential Sexual Harassment Settlements

Jan 15, 2018 | Blog

Judge with gavelEvery new tax bill, no matter how simple it appears on the surface, always seems to contain a couple of surprises hidden within its innocuous exterior. In the recently passed Tax Cuts and Jobs Act, one of those little concealed hand grenades is to be found in a little-noticed amendment that bans deductibility on taxes for any sexual harassment payment or claim if the terms of the settlement provide for any form of non-disclosure agreement, or NDA.

While this provision was obviously ripped from the recent headlines, it leaves a lot of ground that is, or rather will be, subject to various interpretations and legal maneuverings. The problem is that it is not particularly explicit about what is and is not covered by its terms. The language of the amendment specifies payments “related to” sexual harassment or abuse.

One tax attorney in San Jose said “This was clearly intended to pull the plug on any lawyers that got creative ideas about denying any sexual harassment but instead shifting the complaint over to an infraction where the plaintiff is willing to accept millions for something as innocuous as a parking spot discrimination claim instead”. Since many attorneys often utilize the “kitchen sink” approach to sexual harassment claims, there is often a lengthy smorgasbord of additional allegations attached to the major one as a way of showing intent and a pattern of continuing abuse.

Yet the obscurity of the statutory language on taxes leaves a lot of issues open to interpretation. For one thing, attorney’s fees are now also non-deductible when an NDA comes into play– a provision which is certain to bring a host of court challenges from trial lawyers nationwide. Likewise, the law is silent as to whether this amendment applies to the plaintiff’s side as well as to the defendant.

It is clear that the intent of the statute is to discourage serial abusers from being able to repeat these depredations by gagging previous victims of their conduct and thus leaving others unaware of the risks they are exposed to. Of course, the most likely defendants in such actions are all primarily found in the category of those who have so-called “deep pockets”. It may well be that these individuals and institutions will simply opt to accept the elevated taxes that come from including an NDA in the settlement agreement and keep on doing things the way they have always done them in the past.

Given the likelihood of legal challenges from the trial lawyers and the possibility that the intent of the law gets ignored in favor of paying a little extra on the annual tax bill, it seems like a pretty safe bet that this issue is far from settled.

There are really two significant ways in which this measure will move forward as it gains traction. If nothing is done to modify or clarify the language, it can effectively become a dead letter that looks good on paper but results in nothing more than some creative work-arounds to arrive at the same destination which this amendment seeks to proscribe.

The other possibility is that this proves to be but an initial foray into a large expansion of sexual harassment law. Rather than discourage NDAs via tweaks in the tax laws, the alternative would appear to be somewhat of a reversal wherein disclosure of sexual harassment settlements becomes mandatory and NDAs are outlawed entirely, regardless of what sort of outlying issue they are employed on.

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