Jeffrey S. Klein, left, and Nicholas J. Pappas, right, of Weil, Gotshal & Manges.
In response to the #MeToo movement, a number of state legislatures and Congress have enacted legislation to address their concerns regarding sex-based inequities in the workplace. One area of particular focus has been the use of non-disclosure provisions in settlement agreements that resolve allegations of sexual harassment, other forms of harassment, and discrimination. Critics of non-disclosure provisions argue that employers who have used these types of provisions may inadvertently promote a culture of silence around sexual harassment and sex-based discrimination in the workplace, thus enabling the individual perpetrators of harassment and discrimination to avoid accountability. On the other hand, many employers legitimately use non-disclosure provisions to protect the victims of harassment and discrimination, as well as to avoid negative publicity resulting from non-meritorious claims. Without the protection of a non-disclosure agreement, employers may more frequently elect to contest such non-meritorious claims of discrimination or harassment to avoid negative publicity emanating from a publicly disclosed settlement.
The federal government and several state governments have enacted legislation concerning non-disclosure provisions in settlement agreements, adopting varied approaches to the issue, in ways that affect an employer’s incentives and strategic options. In this article, we review the federal tax legislation concerning the deductibility of settlement payments for sexual harassment claims. Next, we review the varied legislative approaches that several states have taken to the issue of non-disclosure provisions in settlement agreements. Finally, we offer a number of practical considerations for employers in light of the current legal landscape.
Federal Tax Deductibility
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