The recently passed tax act promises to have wide ranging impacts on businesses which go beyond the accounting department. There have been attempts by other agencies such as the SEC, EEOC, DOL and NLRB to limit the confidentiality of settlements.  The new tax act follows suit by including a provision which makes confidential payments or settlements including any related attorney’s fees for sexual harassment or sexual abuse nondeductible.

The specific language of the new act states:

(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.

This change applies to any payment made after the law’s enactment including even if the payment is made without a formal settlement agreement, or if the settlement occurred prior to tax reform.

Employers can expect additional guidance addressing issues such as the treatment of expenses for ongoing sexual harassment claims where no settlement has occurred, the apportionment of amounts for settlements of lawsuits/complaints involving multiple types of claims and the treatment of insurance payments covering sexual harassment claims.

In the meantime, employers looking to settle sexual harassment claims will need to weigh the benefits of confidentiality with the added expense of losing a deduction for the settlement amount and related attorney’s fees (it is not clear whether the employer loses the deduction for all fees spent defending the claim or only those fees related to the actual settlement). The loss of the deduction for the settlement can increase the cost to the employer by 10-35% depending on the employer’s tax status.  This provision will have limited impact on non-profits and other entities which are generally exempt from income taxes.

The best advice for employers remains to try to avoid harassment claims altogether by implementing strong non-harassment policies, conducting training and promptly responding to any complaints of inappropriate conduct. For more tips on avoiding harassment see our recent blog post.