Tag Archives: Anti-Bullying

Tax Bill Cuts Deduction for Confidential Sexual Harassment & Abuse Settlements

Contributed by Noah A. Frank and Kelly Haab-Tallitsch, January 3, 2018

On December 22, 2017, the Tax Cuts and Jobs Act was signed into law as P.L. 115-97.  Hidden about halfway into the law, in Section 13307, is an amendment to the tax code on itemized deductions for individuals and corporations. Generally, current law permits employers to treat the costs of settlement payments and related attorney’s fees as a tax deductible business expense. However, the recent amendment eliminates the deduction in certain situations, stating:

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. (26 USC 162(q)).

This change applies to any payments made after December 22, 2017, including payments for settlements that occurred prior to this date.

The result of this amendment is that business must weigh their desires to (a) deduct the settlement as a business expense, versus (b) keep allegations and settlement of sexual harassment/abuse claims confidential. Employers may have been willing to pay more for an agreement with a non-disclosure provision, but the inability to deduct the settlement may be changing this calculus.

Interestingly, the amendment applies only to sexual harassment/abuse related settlements in for-profit businesses – it does not impact settlements:

  • Related to race, religion, age, disability, other civil rights-type causes of action, employee benefits claims, breach of contract, or other employment related claims.
  • For tax exempt enterprises (that do not have such deductions to take), or
  • For government agencies (that do not pay federal taxes).

The IRS and courts will be left to clarify the nature and extent of this amendment, including (i) what “related to” means; (ii) whether part of a settlement can be confidential if there are multiple causes of action (e.g., sex and age harassment); (iii) whether attorney’s fees may be apportioned between investigation, evaluation, multiple claims, etc. to allow for a deduction if the final result is a confidential, sexual harassment related settlement agreement.

What this means for your business:

Of course, the best position to be in is to prevent claims in the first place. Seek the advice of employment counsel for effective preventative measures. At a minimum, employers must conduct regular antidiscrimination/anti-sexual and other harassment training (bullying, too, in some states), and ensure that employment policies, reporting procedures and the like remain up to date.

But if there is a claim of sexual harassment and/or abuse for which a business decides to settle, the business will be left to determine whether a tax deduction or confidential settlement is more important, and how to handle related issues.

No Bullies Allowed!

Contributed by Noah A. Frank

Beginning January 1, 2015, California employers (with 50 or more employees) must provide anti-bullying training to supervisors within 6 months of assuming a supervisory role, and during biannual anti-sexual harassment training.  California broadly defines workplace bullying as: “Conduct of an employer or employee in the workplace, with malice, that a reasonable person would find hostile, offensive, and unrelated to an employer’s legitimate business interests.”  This may include:

  • Repeated infliction of verbal abuse (e. g., derogatory remarks, insults, and epithets),
  • Verbal or physical conduct that a reasonable person would find threatening, intimidating, or humiliating, or
  • Gratuitous sabotage or undermining of a person’s work performance.

There is no question that bullying has negative impacts in the workplace.  It lowers morale and productivity, and may lead to union organizing activity – especially when the bully is a supervisor.  Tennessee is the only other state with an anti-workplace bullying law (which applies only to public employers); and all states (except Montana) have school anti-bullying laws to protect students.  Many other states require or highly encourage some form of employment anti-harassment training (including Colorado, Connecticut, Florida, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Michigan, Nevada, New Jersey, New Mexico, North Carolina, Ohio, Oklahoma, Pennsylvania, Rhode Island, Texas, Utah, Vermont, Washington, and Wisconsin).

However, California’s law signals a dangerous shift in human resources management.  While there is no private cause of action, an employer that fails to incorporate anti-bullying into their biannual training will certainly see this as part of a discrimination/harassment/retaliation claim – and worse, will likely see claims for deficient training and enforcement.

Practical Advice

Audit your policies to ensure a productive workplace, free of illegal and otherwise unproductive harassment and discrimination.  For example:

  • Open Doors: provide employees with a retaliation-free mechanism to report concerns and have open dialogue with management.  Make sure they know about it.
  • Stop bullying.  If you don’t do it now, a new union may form tomorrow.
  • Establish appropriate conduct policies and enforce them.
  • Train supervisors to recognize and correct unproductive and inappropriate conduct.
  • Take proactive steps, such as moving, disciplining, or terminating bullies.

But use caution: implementing rules only after concerted protected activity (“once it is too late”) could also lead to unfair labor practice charges (see, Care One at Madison Avenue, 361 NLRB No. 159 (12/16/2014), discussed in our February 3, 2015 blog).  Thus, seek the advice of counsel when difficult or compound situations arise.