• Deduction Denied for Settlement of Sexual Harassment Claims Subject to Nondisclosure Obligations
  • April 4, 2018 | Author: Philip A. Toomey
  • Law Firm: Leech Tishman - El Segundo Office
  • A little-noticed provision of the Tax Cuts and Jobs Act prohibits deductions for payments made after December 22, 2017, in settlement of sexual harassment or abuse claims, if such settlements are subject to any nondisclosure agreement. Section 162(q) of the Act also denies deductibility of attorney fees related to such settlement or payments.

    The vast majority of settlement or severance agreements are drafted in a manner to provide the greatest possible release for employers. When dealing with settlements that purport to release “all claims arising in relation to employment” and where some confidentiality is sought, employers must now consider the potential application of 162(q). Many employers carry employment practices liability insurance (“EPLI”). Despite having EPLI, for those settlements that have confidentiality provisions and also release claims within the scope of 162(q), payments made against an employer’s EPLI deductible or self-insured retention may no longer be deductible for income tax purposes.

    There are several options for employers. First, if confidentiality is a must, an employer may either (1) agree that there be a specific carve-out from any release in the settlement or severance agreement claims within the scope of section 162(q), or (2) consent that proceeds paid in settlement (and for attorney fees) are not deductible for income tax purposes. Second, an employer may decide not to seek confidentiality of the settlement terms or payments. This might be practical in routine severance agreements, where specific claims have not been asserted, but the employer desires to obtain a broad-based release to ensure the whatever issues were in the past, stay in the past.
    In conclusion, when the information sought to be released even remotely involves employment claims, there is no longer a one-size-fits-all settlement or severance agreement if it will impose confidentiality.
    Leech Tishman’s Employment Practice Group can help clients ensure compliance with complex and technical employment laws and can assist clients with defending against civil or administrative actions.