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The Taxman Cometh for Sexual Harassment Settlements

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As you know, over the last few months, sexual harassment allegations have surfaced all over the place, from Hollywood to Capitol Hill to the Today Show. The hot topic of harassment in the workplace has garnered attention from employers and legislators alike, and it has prompted Senators to amend the new tax bill in an effort to curb nondisclosure agreements in sexual harassment settlements.

The Amendment Provides:

(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 amendment’s proponents insist that it eliminates protection for sexual offenders in the tax code. Its critics, however, are skeptical that the amendment will make a difference, and they believe employers will still opt for the nondisclosure agreement. Additionally, another portion of the tax bill eliminates a plaintiff’s ability to deduct legal fees, so critics believe it penalizes accusers more than offenders.

This provision of the tax bill became effective on December 22, 2017, so employers (and individuals) that paid or incurred sexual harassment-related settlement payments prior to that date will generally still be able to deduct those payments as business expenses when they file tax returns in the next few months.

As new laws often do, the amendment raises more questions than it answers. It refers to settlements or payments “related” to sexual harassment or abuse. Employment lawsuits often involve kitchen sink claims—the same plaintiff may allege sexual harassment alongside medical leave interference or wage-and-hour violations. The amendment provides no guidance on deducting such expenses if only part of the settlement relates to a sexual harassment claim.

Regardless of the financial implications of the tax bill amendment, its inclusion in the tax bill marks a new era where sexual harassment claims are more prevalent and are getting closer attention from courts and the media. Rather than focusing on the tax write-off after a claim is raised, employers should focus on preventing these claims altogether by updating their policies, training, and reporting procedures.

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