In a clear response to the #MeToo movement, Congress added a provision in the new tax law that directly affects how businesses resolve claims of sexual harassment.
Among other things, the law creates consequences for companies that include confidentiality provisions as part of settlement agreements.
Although the intent behind the new law is fairly narrow and aimed at true wrongdoers, the vague drafting of the law leads us to conclude that it will apply to a much broader set of circumstances.
Companies should re-evaluate their approach to settling claims of sexual harassment as those consequences will be imposed now that the new law went into effect on January 1, 2018.
Gunster's labor & employment legal team have prepared the following to help business leaders better understand the implications of the new law.
What is the new law and what is it intended to do?
The narrow intent of the new law is to prevent wrongdoers from getting a tax break for what members of Congress have referred to as “hush money,” – or, money spent by businesses to hush up true victims of sexual abuse or harassment.
Although well-intentioned, Congress’ approach to accomplishing this mission was to add a single vague sentence to the new tax law that seems to have a much broader impact, regardless of whether there is actual wrongdoing or not. That sentence reads as follows:
“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.”
This language is unclear and leaves companies – and the sexual assault or harassment victims it is designed to protect – with many unanswered questions as to how it will work.
The law creates many unanswered questions
The law does not define “settlement or payment related to sexual harassment or sexual abuse.”
Because this law is so vaguely drafted, there are several important but unanswered questions as to what this bill does and how it works.
For example:
- Will it apply to false or unfounded allegations of sexual harassment or abuse? As many employers have experienced, disgruntled employees sometimes raise false allegations – whether of sexual harassment or another unlawful employment practice.
- If a company settles a claim it knows to be false or unfounded to avoid the cost of litigation, does the new law apply?
- Will it apply to acts that don’t actually amount to sexual harassment as defined by Title VII? It is not uncommon for a claim to get dismissed because the allegations don’t amount to sexual harassment as defined under Title VII or Florida law.
- Does it apply to severance agreements that release Title VII or Florida law claims, even when there hasn’t been an allegation of sexual harassment or sexual abuse?
- Does it apply if there are other claims settled along with a claim of sexual harassment – such as whistleblowing or retaliation?
- Does it apply to the entire settlement, or only those portions that relate to the sexual harassment claim?
The law does not specify answers to any of these questions.
Implications for businesses
Although it is unclear under what circumstances the law will apply, what is clear is that it only applies when a nondisclosure or confidentiality provision is part of the settlement.
The implication is clear: employers will have to decide between maintaining confidentiality surrounding the settlement or getting the business expense deduction for the settlement and attorneys’ fees.
But the consequences don’t end there.
One other potential seemingly unintended consequence of the law relates to its impact on the settling employee. The language states that it applies to settlements “under this Chapter.” The use of the term “Chapter” means the provision could also possibly apply to the proceeds of the settlement for the employee – that is, the employee may also be on the hook for taxes on the value of attorneys’ fees paid on behalf of the employee as part of a settlement that includes a confidentiality provision.
How will this potentially impact businesses? Employees and potential plaintiffs will be less likely to accept a settlement that includes a confidentiality provision if there’s a possibility they will be required to pay taxes on the amount of attorneys’ fees they received as part of the settlement.
With so many unanswered questions it is more important than ever to consult with counsel before entering into a settlement agreement or release with an employee.
Should you need assistance in preparing a settlement or navigating a potential claim, please contact Gunster’s employment law legal team at 561-650-1980.
