Believe it or not, even the new tax law addresses sexual harassment, bringing several unanticipated changes for employers (and employees) that will impact how employers approach settling sexual harassment claims. Under the Tax Cuts and Jobs Act (the Act), employers may no longer deduct settlement payments and attorney’s fees for resolving sexual harassment or sexual abuse allegations included in a confidential settlement agreement. 

Section 13307 of the Act states 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.

This change applies to settlement payments made after December 22, 2017, even if the settlement agreement was executed before that date. 

The #MeToo movement has taken credit for this legislative change – asserting a desire to “expose” sexual harassers. However, employers settle claims of sexual harassment for many reasons unrelated to the truth or falsity of the allegations. For example, many employers choose to settle sexual harassment allegations due to the expense and time associated with litigation. 

Settlement agreements typically include non-disclosure restrictions to protect the affected parties. Based on the Act, employers must now weigh their desire to keep these agreements confidential against their ability to deduct the payments attributable to the settlement.

The Act also eliminated the up to $255 per employee deduction for providing commuter and parking benefits to employees. Although not eliminated, the Act lowered the amount employers can deduct for the cost of food and beverages provided to employees.

Employers should consult with their legal counsel to fully address the impact these changes may have to their businesses.