This article is the first of 3 parts to cover 3 Acts of Congress directed at expanding the rights of sexual harassment and abuse victims.
The series of 3 federal laws on sexual harassment claims
- Congress first in 2017, with the Tax Cuts and Jobs Act (“TCJA”), limited employer tax deductions for settlements of sexual harassment and abuse cases where the settlement agreement included a nondisclosure agreement. That’s what this article is about.
- Congress next in March 2022 passed the Ending Forced Arbitration of Sexual Assault and Harassment Act of 2021 which invalidates arbitration agreements over sexual harassment and abuse claims, where the agreement is signed before a dispute arose. That’s my second article in this series.
- Congress then in December 2022 passed the Speak Out Act which invalidated nondisclosure and non-disparagement agreements in sexual harassment and abuse claims where the agreements were procured before a dispute arose. That’s my third article in this series.
2017: Congress disallows certain employer tax deductions from settlement of sexual harassment and abuse claims
I’ll start with arguably the most boring of the laws, the 2017 Tax Cuts and Jobs Act (“TCJA”). It modified the tax code to change limit tax deductions taken by companies for settlement money paid in cases involving sexual harassment or sexual abuse. The full TCJA is here, but only a very small part of it deals with our issue.
In 26 U.S.C. § 162(a), businesses are allowed tax deductions for “ordinary and necessary” expenses incurred in carrying out the business.
New section 162(q) attacks nondisclosure agreements (“confidentiality agreements”) in sexual harassment cases by prohibited the employer from deducting money paid in settlement, including payments for attorneys’ fees, where the settlement concerned a claim for “sexual harassment or sexual abuse” and the settlement agreement involved a “nondisclosure agreement”. Nondisclosure or confidentiality agreements are sometimes called “hush agreements” in the popular press.
The import of the nondisclosure provision is that the employer purchases the silence of the employee, in exchange for a payment of settlement money, so that the employee may not tell anyone about the alleged sexual harassment of sexual abuse that was the subject of the legal claim.
The effect of 162(q) is that the employer may claim a deduction for the settlement money and attorney’s fees in the same type of case if there is no nondisclosure agreement. Thus, the cost of requiring nondisclosure is that the employer may not deduct the settlement money and attorneys’ fees.
Section 162(q) states:
Payments related to sexual harassment and sexual abuse.–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 U.S.C. § 162.
But if an employer wants a tax deduction for the costs of settling a sexual harassment claim, they won’t be able to also include a nondisclosure agreement as one of the terms in the settlement. In other words, if the employer wants the worker to stay quiet about what happened to them, the employer can’t take the tax deduction for the money spent to settle the case.
The movement against nondisclosure agreements in sexual harassment claims
Back in 2019, there was a forceful article in Atlantic Magazine, “Hush Contracts Corrupt Everyone Who Signs Them, which argued against forcing women to be silent about sexual harassment as part of the settlement process. The argument is that commonplace settlement nondisclosure provisions thwart the enforcement of the anti-discrimination laws by preventing settling employee from discussing their allegations of sexual harassment, and by preventing the employee from cooperating with other litigants (unless subpoenaed).
There has been a growing movement against the use of nondisclosure agreements in settling employment discrimination claims. Several states have now passed laws restricting the use of nondisclosure agreements in settling employment discrimination claims. Some of those laws are limited to sexual harassment claims, but some of the states have much more broadly prohibited or restricted use of nondisclosure agreements in all forms of discrimination prohibited by state anti-discrimination laws. The National Women’s Law Center has put together a very helpful list of recent state laws addressing workplace harassment, and several of those laws specifically limit use of nondisclosure agreements. West Virginia is not amongst the states limiting nondisclosure agreements under claims involving the West Virginia Human Rights Act.
Part 3 of this series will address the new federal Speak Out Act, passed in December 2022, limiting use of nondisclosure and nondisparagement agreements in certain specific contexts.
- Happy New Year! — January 1, 2023
- Congress against sexual harassment, part 1: Taxes — December 26, 2022
- Merry Christmas to all! — December 25, 2022