New Tax Implications for Confidential Sexual Harassment Settlements

Companies that have made confidential settlement payments related to sexual harassment claims should be aware that the recently enacted federal tax reform law, the Tax Cuts and Jobs Act, includes a provision prohibiting employers from deducting such confidential payments from business income, potentially making sexual harassment settlements more expensive for employers.

Read our complete client alert.

Key Takeaways

• The recent federal tax reform law states that an employer's confidential settlement payment relating to a sexual harassment claim is no longer deductible from business income.
• The new law also prohibits deduction of other expenses relating to such confidential settlements, including legal fees and potentially other unspecified expenses.
• Payments related to sexual harassment are not impacted by this prohibition if they are not governed by a confidentiality requirement, so employers will want to carefully consider whether to include a confidentiality term in their settlement agreements.

Kasowitz's Employment Practices and Litigation group has extensive experience and familiarity with negotiating settlement agreements and in defending sexual harassment and other employment-related claims. Our employment group has been recognized in Chambers USA, The Legal 500, Benchmark Litigation, and U.S. News - Best Lawyers "Best Law Firms."

For more information, please contact partners Mark W. Lerner.