The newly-enacted Tax Cuts and Jobs Act will have an impact on both employers and employees with regard to the settlement of sexual harassment and/or sexual abuse claims.  Specifically, under IRS § 162(q), no deduction shall be allowed for “any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement” or “attorneys’ fees related to such a settlement or payment.”  Prior to the enactment of this law, employers were generally permitted to deduct legal settlements paid to plaintiffs as well as attorneys’ fees incurred for the defense of sexual harassment claims.  In addition, prior to the enactment of this law, plaintiffs were generally allowed to deduct their attorneys’ fees in connection with settlements pertaining to sexual harassment claims, even with the presence of non-disclosure language.  This provision appears to have been enacted to deter employers from including non-disclosure language in settlement agreements pertaining to sexual harassment claims.  However, this provision raises many questions or both employers and employees.

From the employer’s perspective, companies will need to weigh the value of having non-disclosure language included in settlement agreements pertaining to sexual harassment or sexual abuse claims.  Indeed, companies will have to decide whether, from a public relations stand-point, it is worth not including the non-disclosure language in order to claim the deduction for the settlement and accompanying attorneys’ fees; or conversely, whether it is more important for them to have the non-disclosure language included in the settlement agreement, which will prohibit the deduction. From an employee’s perspective, this law may be problematic as well.  Even though the intent of the provision is clearly to deter keeping sexual harassment or sexual abuse claims confidential, the provision may jeopardize the plaintiff’s ability to deduct their own attorneys’ fees in connection with settlements pertaining to such claims.  It remains to be seen whether the IRS or Legislature will provide any further clarification or guidance regarding this law.

If you have any questions regarding sexual harassment in the workplace, please contact the Law Office of Frank A. Custode, LLC.