Client Alerts / 01.25.2018

Where #MeToo Meets Tax Reform

By Robert S. Gilmore and Kirsten B. Mooney

From Hollywood to Washington, claims of sexual harassment against powerful people have dominated national headlines for months, fueling the #MeToo movement of women stepping forward with their own accounts of sexual harassment and abuse.

Now, the #MeToo movement has found a place in the Tax Cuts and Jobs Act, signed into law by President Trump on December 22, 2017. The Act includes a provision which aims to eliminate tax deductions for settlement payments and attorney’s fees paid in connection with a sexual harassment or sexual abuse matter subject to a nondisclosure agreement. The provision reads:

SEC. 13307. DENIAL OF DEDUCTION FOR SETTLEMENTS SUBJECT TO NONDISCLOSURE AGREEMENTS PAID IN CONNECTION WITH SEXUAL HARASSMENT OR SEXUAL ABUSE.
(a) Denial Of Deduction.—Section 162 is amended by redesignating subsection (q) as subsection (r) and by inserting after subsection (p) the following new subsection:
(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.”

The #MeToo-influenced amendment was proposed in November 2017 by Senator Robert Menendez of New Jersey with the intent to disincentivize the use of confidentiality clauses and NDAs in sexual harassment and sexual abuse settlements. In sum, the provision seeks to protect those who allege sexual harassment, encourage them to publicly tell their stories, and potentially prevent harassers from continuing their conduct.

However, because the bill was so hastily drafted, there are a number of ambiguities in its simple language that are sure to be the subject of many years of litigation. Here is what employers and others need to know about the uncertainties of this amendment:

  • The definitions of “sexual harassment” and “sexual abuse” are ambiguous. The bill refers to settlements or payments “related to” sexual harassment and sexual abuse, but never defines either term or indicates what types of allegations have sufficient merit to constitute “related to.” For example, claims such as gender discrimination or retaliation will oftentimes accompany a sexual harassment or abuse claim because they arise out of the same circumstance. Would these be considered “related to” sexual harassment and subject to the tax consequence as well?
  • Sexual harassment claims often don’t stand alone. Of similar significance, many cases involve other, separate claims – such as discrimination or tort claims – apart from a sexual harassment or sexual abuse allegation. However, the provision only addresses those claims “related to” sexual harassment or abuse. Is it permissible to allocate the settlement amount among these claims, and thereby save the tax deduction for the portion of the amount paid related to non-related claims? Or, is the entire settlement agreement subject to the tax consequence?
  • The scope of the provision is exceedingly broad. As read literally, not only will a defendant (employer) be prohibited from deducting payments made that relate to sexual harassment or abuse claims, but a plaintiff (employee) might also be prohibited from deducting payments or fees related to their allegation(s). This was likely not the intent of the bill, but it is unclear and will need to be fleshed out in a court of law.
  • Can the measure actually influence change? Many commentators have already stated that this provision may merely be symbolic and will not influence much change in the way corporations settle sexual harassment or sexual abuse allegations. Companies value confidentiality clauses and NDAs because they protect the company’s reputation and shelter them in future lawsuits. In reality, companies will still likely choose an NDA as part of a settlement of sexual harassment or abuse claims, even in the face of the tax consequence, to keep the allegation out of the public limelight.

The bottom line? The tax consequence of including a confidentiality agreement or NDA as part of a sexual harassment settlement is not necessarily a motivation to exclude it. It is a decision that every employer and its attorney should think carefully about – what is the value of securing the deduction versus the risk of foregoing confidentiality? Employers should also think about how the additional taxes will raise the costs in settling. This could reduce the amounts for which companies will be willing to settle, and, potentially, the amounts a plaintiff is likely to receive.

The best course for any employer is to be as diligent as possible in ensuring that sexual harassment or abuse does not occur in the workplace. Review and update company policies on sexual harassment and abuse, and implement training and education on these topics for all employees. Employers should also be sure to immediately investigate allegations of sexual harassment or abuse and address them promptly before they become the basis for legal action.

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