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Tax bill scraps employer deductions for sexual harassment settlements with NDAs attached

By Lisa Milam-Perez, J.D.

With passage of the Republican tax reform legislation hurling toward final approval, employers will no longer be able to take a deduction for payouts to quell employee allegations of sexual harassment or sexual abuse. An amendment introduced by New Jersey Senator Robert Menendez, a Democrat, would eliminate a currently allowable deduction for sexual harassment settlements (and related attorney fees) that contain a nondisclosure agreement (NDA).

Menendez amendment. Specifically, Section 13307 of the Tax Cuts and Jobs Act provides that “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.”

The provision was introduced in November, as the onset of high-profile sexual harassment accusations sparked the burgeoning “#metoo” movement and launched a collective national reckoning that is currently rattling the halls of Congress. With reports surfacing that The Weinstein Company, Fox News, and other employers have floated big-money settlements in exchange for silence in lawsuits against power players like Harvey Weinstein and Bill O’Reilly, there is consternation over whether such confidentiality provisions play some part in allowing a culture of unchecked harassment to flourish.

Against this backdrop, the Menendez amendment made its way into the final version of the tax reform measure that was unveiled on Friday, December 15, and, barring unforeseen hurdles, will pass both chambers by Wednesday.

Impactful or symbolic? From a practical perspective, NDAs have proven a valuable tool in resolving contentious and emotionally fraught litigation, to mutual advantage. Will eliminating the deduction impact future settlement negotiations in such cases, or is this legislative gesture likely symbolic?

“I suspect this amendment won’t cause a sea change in the number of cases that settle or the financial terms of those settlements,” notes David Wachtel, a partner in the Washington, D.C. firm Trister, Ross, Schadler & Gold, PLLC. (Wachtel, a member of the Employment Law Daily Advisory Board, has negotiated settlements in such cases on behalf of both employees and employers.) “Most private-sector settlements of sexual harassment cases require confidentiality, at least concerning the terms of the settlement. Many of these settlements also include a nondisparagement clause that prevents the person who experienced harassment from talking or writing about it.” On the other hand, as a matter of policy, the Department of Justice does not require confidentiality or nondisparagement clauses, Wachtel notes, “and cases in which DOJ represents the federal government settle without NDA clauses.”

Employers will likely respond to the legislative ways in varying ways, based largely on circumstances. “We’ll see a variety of approaches if the Menendez amendment becomes law,” Wachtel said. “Some employers will waive confidentiality rather than pay the additional tax. Others will negotiate for confidentiality and pay the tax.”

In the end, Wachtel predicts, “the #metoo movement may be bringing a change in respect to confidentiality clauses, but Senator Menendez’s amendment will not complete the change.”