The #Metoo movement and high profile sexual harassment allegations involving prominent Americans has influenced provisions of the new tax reform law.  The Tax Cuts and Jobs Act signed by President Trump on December 20, 2017, limits the deductibility settlements paid on sexual harassment claims where the settlement agreement contains nondisclosure provisions.  Section 13307 of the Act provides, in relevant part, that:

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.

Effective Date.  The amendments made by this section shall apply to amounts paid or incurred after the date of the enactment of this Act.

The effect of this new tax law will discourage plaintiffs and companies from including confidentiality or nondisclosure provisions in sexual harassment settlements as those settlements, including the amount of attorneys’ fees received by the employees’ attorneys, will be included in the employees’ gross income and without a corresponding deduction for the employee.  Additionally, it may discourage employers from settling some sexual harassment claims or cause those claims to be valued less by employers who are unable to procure confidentiality or nondisclosure commitments from plaintiffs or are unable to deduction the amount of the settlement as a deduction.

Employers settling sexual harassment or sexual abuse claims should consult with their employment lawyer and tax professionals to evaluate the effect the tax law has on settlements paid or incurred after December 20, 2017.