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Last year was a year of controversies.  One of the most significant was the wave of sexual harassment allegations that swept across all industries, from Hollywood to professional sports to journalism and television broadcasting.  Almost every day a new prominent figure was being accused of inappropriate sexual conduct towards subordinates.  One central concern was the silence preceding this wave of allegations.  In many cases, the allegations encompassed years of harassment, but the victims had previously felt powerless to come forward.  Last year was different because a number of individuals decided to share their stories, which inspired others to do the same, and what started as a trickle became a flood.  As we all may recall, TIME Magazine named the “Silence Breakers” its Person of the Year for their courage in coming forward.

With the passage of the new tax law, the federal government has attempted to ensure allegations of sexual harassment will not be hidden any more.  One section of the newly-passed law mandates:

No deduction shall be allowed … 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.

With this change, companies will still be able to avoid litigation by settling sexual harassment allegations out of court, but it will now be much more expensive to ensure confidentiality.

Of course, some commentators believe this new rule will also penalize victims of harassment because they will no longer be able to write off the portion of their settlements which go to their attorneys and will instead be taxed on the entire settlement amount.  In fact, some believe the IRS will interpret this provision to mean attorney’s fees in sexual harassment settlements are no longer deductible, regardless of the existence of a non-disclosure clause.  Time will tell which interpretation the courts will follow.

What should employers do if they are settling a sex harassment claim in light of this change?  You should evaluate whether the value of the tax write-off is worth more than the value of keeping the allegations confidential.  You also must recognize that even with a confidentiality clause, leaks are not uncommon.  However, this is a decision you must make on a case-by-case basis with the help of competent counsel.

Brody and Associates regularly advises management on complying with the latest state and federal employment laws.  If we can be of assistance in this area, please contact us at info@brodyandassociates.com or 203.454.0560.