By Stephen S. Zashin*
On December 22, 2017, President Trump signed the “Tax Cuts and Jobs Act,” which is a sweeping tax reform law the size of which the United States has not seen in decades. As a significant part of this new law, employers can no longer deduct sexual harassment settlements and associated legal fees as a business expense, when the settlement is contingent upon a nondisclosure agreement. In this context, a nondisclosure agreement typically would prohibit the parties from disclosing the terms of the settlement or the alleged facts supporting the sexual harassment claim. The recent barrage of sexual misconduct allegations against celebrities, such as Harvey Weinstein, Matt Lauer, Bill O’Reilly, and Al Franken — and confidential settlements arising from these types of accusations — prompted this change to the tax law.
The “Harvey Weinstein Tax,” as some are calling it, is not a tax. Rather, the provision prohibits tax deductions. Prior to this law, sexual harassment settlements and related attorneys’ fees were deductible business expenses. However, the new law prohibits such deductions for amounts paid or incurred pursuant to a confidential settlement. To illustrate, under the new law, if a company paid a $1 million sexual harassment settlement, it is prohibited from deducting that amount if the settlement contained a nondisclosure agreement. However, in the absence of a nondisclosure agreement, and assuming a 21% corporate tax rate, the company may deduct the $1 million settlement for a tax savings of $210,000.
In the example above, the company would need to determine whether a tax savings of $210,000 is worth a nondisclosure agreement (i.e., prohibiting the employee from discussing the terms of the settlement and the underlying circumstances and allegations). This tax provision has both legal and tax consequences. Employers settling sexual harassment claims should discuss with counsel, chief financial officers and potentially their tax consultants, this new tax provision and its implications on settling any sexual harassment claim.
*Stephen S. Zashin, an OSBA Certified Specialist in Labor and Employment law and the head of the firm’s Labor, Employment and Sports Law Groups, has extensive experience litigating and resolving sexual harassment claims. For more information about settling sexual harassment claims, please contact Stephen (ssz@zrlaw.com) at 216.696.4441.
