Legal Blog

Tax Reform’s Impact on Confidential Sexual Harassment Settlements

Many business owners are studying the reconciled tax bill currently pending in Congress, interested to know how the reforms will impact their bottom-line.  However, there is a provision contained in the current version of the tax bill that is designed to increase accountability for sexual misconduct in the work place.

Generally, the current law permits employers to treat the costs of settlements and related attorney’s fees as a tax deductible business expense.  The reconciled tax bill would limit the tax deduction associated with sexual misconduct settlements and costs.  The proposed law would prohibit businesses from taking a tax deduction for money paid for “any settlement or payment related to sexual harassment or sexual abuse” and attorney’s fees related to such a settlement/payment if the payments contain non-disclosure provisions.  In other words, if passed, the federal government will no longer permit tax deductions for confidential sexual misconduct settlements.  The proposed new law appears to be a direct reaction to the current wave of public sexual misconduct allegations.  Interestingly, this proposal only addresses sexual harassment and sexual abuse settlements and not discrimination or harassment more generally.

Passage of tax reform that includes this provision will undoubtedly cause employers to recalculate the cost-benefit of paying settlements with confidentiality provisions – a standard settlement term.  In effect, this modification of the existing law creates a confidentiality premium.  This means that employers that may have been inclined to pay a settlement in order to keep claims of immoral or embarrassing sexual misconduct quiet will now have to pay more money to do so or that they may be more likely to litigate claims knowing that the allegations will not be confidential.  Moreover, it will likely raise questions as to whether or not payments are “related to sexual harassment or sexual abuse” and how such a standard will be policed.

In any event, though there are numerous issues to navigate when determining whether to forego tax savings, forego confidentiality, or to litigate, being forced to make such decisions means that the employer is already exposed.  The best way to address this conundrum is to avoid sexual misconduct in the workplace altogether.  While nothing is foolproof, employers that have detailed policies that are reinforced on an annual basis and that conduct regular trainings can lower their risk and reduce costs.

If you have any questions about how to prevent and address workplace misconduct, please contact me at or 410.209.6449.


Russell Berger is an accomplished labor and employment attorney who is well-versed in litigating in both state and federal courts, as well as providing counsel to employers on employee matters. He represents employers, businesses and professional clients in employment disputes throughout the country. Mr. Berger primarily focuses on litigating and counseling clients regarding matters of minimum wage and overtime under the Fair Labor Standards Act and state laws, wrongful termination, non-compete agreements, and employment and severance agreements. Mr. Berger’s practice also includes handling claims and providing counsel regarding retaliation, discrimination and harassment (under Title VII and state anti-discrimination laws), as well as under other federal statutes, such as the Family Medical Leave Act (FMLA), the Age Discrimination in Employment Act (ADEA), and American with Disabilities Act (ADA). He also provides general counsel to businesses, including with respect to commercial, contracting, and insurance matters.




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