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New Tax Law Prohibits Deduction for Sexual Harassment Settlements With Confidentiality Clauses

    Client Alerts
  • January 15, 2018

The new tax reform law contains a provision intended to address continuing concerns over sexual harassment in the workplace. Now employers that settle sexual harassment or sexual abuse claims with employees cannot deduct payments made under those agreements or related attorneys’ fees as business expenses under their federal tax returns, if the settlement contains a nondisclosure agreement that prevents the alleged victim from discussing the harassment.

Employers’ reactions to this new rule will vary based on their motivation in settling the claim. In cases where the nondisclosure agreement is an essential component in the employer’s consent to settle the matter, companies will most likely treat these tax consequences as additional costs associated with the settlement. In other cases, employers may drop the traditional nondisclosure provision, especially in situations where the harasser is no longer associated with the business.