A provision in the new tax law intended to limit deductibility by companies of confidential payments for sexual misconduct settlements may inadvertently harm the victims it was intended to help.
The new section reads as follows: “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.”
Confidentiality provisions have protected some perpetrators, perhaps enabled them, allowing them to avoid public scrutiny and be free to repeat their misconduct against other victims. Some businesses may have regarded the payments as costs of doing business, rather than serving to remediate “bad” behavior, and the confidentiality provisions guard against additional lawsuits. On the other hand, confidentiality provisions are often effective to protect careers and reputations in marginal cases where companies decide to settle for practical business reasons, but want to protect innocent executives.
The goal of the new limitation was to limit the tax code’s subsidizing offenders by allowing deductions for what amounts to “hush money,” a laudable goal, but it may have unintended consequences. Will fewer cases settle as companies lose the incentive of confidentiality and protecting their reputations and offer less money to victims? Will the value of victims’ cases be diminished when they can no longer offer confidentiality? What about victims themselves who seek confidentiality so they can move on with their lives and avoid embarrassment or retaliation?
The public sector has long lived with non-confidentiality provisions in the payment of these awards. Congress, on the other hand, is not affected by the new provision, since the United States government is not a taxpayer. Ironically, tax-exempt religious organizations, some of whom have paid significant awards, are not affected and will continue to be able to make confidential settlements.
The provision also raises questions of allocation if other employment related claims are raised, such as discrimination or retaliation. Can an employer allocate a small amount to the settlement of the harassment claim with the balance allocated to other causes of action?
We support the concept of limitation of deductibility for payment of sexual harassment and abuse claims. Maybe the confidentiality requirement should be eliminated.