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Silence Just Became More Expensive: Trump Tax Reform Requires Employers to Choose Between Tax Deduction and Confidentiality of #MeToo Settlements

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Silence Just Became More Expensive: Trump Tax Reform Requires Employers to Choose Between Tax Deduction and Confidentiality of #MeToo Settlements

Much of the media’s coverage of the recent tax reform has focused on the benefits to corporate America. However, one provision of the Tax Cuts and Jobs Act of 2017 that has received little coverage is perceived to address concerns raised in the #MeToo movement regarding confidential settlements of sexual harassment claims. Specifically, the Act added a new section to the Internal Revenue Code, which prohibits deductions for amounts paid to settle sexual harassment and sexual abuse claims when the settlement is subject to a nondisclosure agreement. In effect, the Act requires an employer to choose between a tax deduction and confidentiality of the settlement. Given that confidentiality is often a critical component of a typical employment settlement agreement, particularly for claims that may involve salacious allegations, employers now face a more difficult calculus. At a minimum, employers should anticipate that sexual harassment claims will be more costly to settle if the agreement includes a non-disclosure provision.

Section 162(q) of the Internal Revenue Code is effective for amounts paid or incurred after December 22, 2017, and states:

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.

Prior to the enactment of Section 162(q), ordinary litigation expenses, including attorney’s fees and settlement payments, were generally deductible. Now an employer who settles a sexual harassment claim confidentially will no longer be able to deduct the amount of the settlement payment or the attorney’s fees related to that settlement.

This new law may have unintended consequences despite its apparent effort to address an important social issue. Rather than simply requiring an employer to choose between the cost of increased taxes or the cost of public scrutiny on settlements, the Act may make employers less likely to settle (or, at least, to settle at the same amounts) and more likely to roll the dice in litigation to vindicate their position, exposing #MeToo plaintiffs to the emotionally taxing experience of trial where employers’ attorney’s fees will still be deductible.