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How Deductions for Confidential Sexual Harassment Settlements Were Eliminated

Nondisclosure agreements (NDA) are notoriously common during workplace sexual harassment settlements. For many decades, your employer could settle a confidential sexual harassment claim and receive a tax deduction. However, a recent tax reform bill forces your employer to choose between using an NDA and receiving a tax deduction.

Section 13307 of the Tax Cuts and Jobs Act (TCJA) states that no tax deductions are available for “any settlement related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement.” It also states that there are no tax deductions for “any attorney’s fees related to such a settlement or payment.”

Questions Raised by California Employees About the New Guidelines

While the new law discourages the use of confidentiality agreements during sexual harassment settlements, there are important questions that require answers. For example, many employees will file claims against their employers that contain multiple offenses. Some of these offenses may be linked to sexual harassment or abuse. If these claims are resolved via settlements, then are the payments for those claims nondeductible?

Also, the language in Section 13307 of the TCJA is extremely vague and appears to include fees for the plaintiff and defendant. If you settle a sexual harassment claim and sign an NDA, then are your own attorney’s fees nondeductible? The provision states that “any attorney’s fees related to such a settlement or payment” are nondeductible. It does not differentiate between fees incurred by the plaintiff or the defendant.

How Should I Approach a Sexual Harassment Settlement With My Employer?

The recent tax reform bill should not dissuade you from filing a sexual harassment claim against your employer. In fact, the new provisions could potentially work to your advantage as the plaintiff. Our Los Angeles harassment attorneys will help you successfully settle your sexual harassment claim with your employer. If you need more information about how the TCJA will affect your sexual harassment claim, then contact us today at (310) 499-0140 for a free case evaluation.