Deductions end for confidential sexual harassment settlements

Q&A with Paige Hoster Good

published in The Oklahoman | April 10, 2018

Tucked away in the Tax Cuts and Jobs Act of 2017 is a provision, codified at Section 162(q) of the Internal Revenue Code, that prohibits businesses from deducting any payments or settlements related to sexual harassment or sexual abuse if the payment is subject to a nondisclosure agreement.  The deduction prohibition also applies to any attorneys fees incurred as part of those settlement payments.  In a business Q&A with The Oklahoman, labor and employment attorney Paige Hoster Good discussed what this so-called “Weinstein Tax” means for employers.

“As a result of this new law, employers are effectively now forced to choose between confidentiality and tax-deductibility when settling sexual harassment-related claims,” said Good.  “Formerly, during a workplace era that may soon be referred to as “Pre-Weinstein,” employers not only could quietly settle sexual harassment claims by including a nondisclosure agreement that virtually assured the matter would be kept confidential and out of the public spotlight, but they could also deduct the settlement payment and attorney’s fees as a business expense.”

Good added that the law fails to clearly define such terms as “sexual harassment” and “nondisclosure agreement,” giving rise to questions as to the scope of the law and how it is intended to apply to other types of confidential settlements – for example, a confidential agreement to settle a wage and hour claim that includes a general release of all other types of claims, including sexual harassment claims.