By Samantha Bomkamp
WWR Article Summary (tl;dr) The new tax law stipulates that companies can no longer deduct the money they pay out in conjunction with sexual harassment settlements if the deal also includes a nondisclosure agreement.
The tax overhaul law, written last year near the height of the #MeToo movement, could place a bigger financial burden on victims of workplace sexual harassment and make such cases more difficult and expensive to settle.
Companies have long been able to write off the settlement money they pay out to former employees, as well as related attorney’s fees, a provision meant to give employers an incentive to quickly resolve cases.
But the new tax law stipulates that companies can no longer deduct the money they pay out in conjunction with sexual harassment settlements if the deal also includes a nondisclosure agreement.
Nondisclosure agreements prevent employees from sharing confidential information, whether it be the details of a settlement or trade secrets. The tax code change was an attempt to discourage the use of such agreements in conjunction with sexual harassment settlements, because keeping victims silent can allow perpetrators to continue a pattern of bad behavior.
Former Hollywood producer Harvey Weinstein, who pleaded not guilty last month to two counts of rape and one criminal sex act charge, frequently used nondisclosure agreements to silence women who accused him of sexual misconduct.
Some attorneys and business leaders refer to the change in the tax law as the “Weinstein tax.”
But the tax code provision “was scribbled into the margins at the last minute, and not thought through very well,” said Paula Brantner, senior advisor of the nonprofit worker assistance organization Workplace Fairness.
The biggest and most immediate impact of the change could be on victims who, like the companies they settle with, may no longer be able to deduct attorney’s fees, said Bill Tarnow, chair of the labor and employment practice at the Chicago-based law firm Neal Gerber Eisenberg.
Consider this example: Under previous tax law, a victim of sexual harassment who received a $100,000 settlement with a nondisclosure agreement and paid $40,000 of it to her attorneys would only have to pay taxes on the $60,000 she took home. But under the new tax law, she’s obligated to pay taxes on all $100,000, Tarnow said.
An amendment introduced in May in a Senate committee could resolve the issue. The amendment would allow victims to still deduct attorney fees even if the companies they are negotiating with can’t.
Experts are divided over the extent to which the tax code change will affect the way companies approach sexual harassment settlements.
Some say that because of the sensitive nature of such settlements and unanswered questions about enforcement of the new law, companies will proceed as they always have. But others worry that without the incentive of a tax deduction, companies will agree to fewer, and smaller, payouts.
Brantner, for example, expects settlement values to go down this year as a result of the tax change, until the law is clarified. Jon Vegosen, an attorney that represents companies in similar disputes, agrees that is a possibility as companies balance privacy and financial concerns.
“Let’s say a business wants to keep (a settlement) a secret, and it is willing to pay $100,000 with a nondisclosure agreement,” Vegosen said. “Would it be willing to pay that much, or settle at all, without a nondisclosure?”
The law also could make it more difficult to bring both sides together to settle workplace sexual harassment cases, Tarnow said. Businesses, without the benefit of a tax break, will aim for lower settlements, while victims will likely aim higher because of the higher taxes they would pay, he said.
Another big issue: Because many settlement agreements are for multiple infractions, like race and age discrimination, it will be difficult to parse out what is tax-deductible and what isn’t. Settlements that don’t involve sexual harassment can still be deducted, even if they include nondisclosure agreements.
Marc Siegel, a Chicago employment attorney who has represented sexual harassment victims in cases against their former employers, says the new tax law, by singling out sexual harassment settlements and preventing companies from deducting costs, is drawing a distinction between types of harassment.
“The genesis of this law is laudable, but if someone is harassed because they are black, or Mexican, or gay, how do you decide that is less worthy than sexual harassment?” Siegel said.