Employees claiming sexual harassment at work in the USA are likely to be less restrained from going public, not only because of a clamp down on Non-Disclosure Agreements (NDAs) by some States, but because there will be a huge potential tax penalty on companies for imposing an NDA.
At the heart of this change is a lesser known law called the Tax Cuts and Jobs Act, passed in 2017. Interpretations by the IRS of this Act are only just filtering through, but it is already clear that if a company applies an NDA in a sexual harassment settlement, they will not be able to claim the cost of the settlement as a business expense for corporation tax purposes. Moreover, if there is an NDA, the employee receiving a settlement at any stage in proceedings will not be able to deduct their attorney fees from their tax bill – as they previously could. There will also be less of an incentive for employees to hold out for punitive damages as these will now be taxed in full by the IRS.
The outcome of this change means that employers will be less inclined to apply gagging orders and employees less inclined to enter into extensive negotiations over a settlement, or proceed to litigation if an NDA applies over fears about the legal costs that may not be offset – especially if they lose or come away from negotiations empty handed. However, there will be something of an incentive for employers to act as though they are happy to proceed to litigation – knowing that the case will be reported anyway and be in the public domain (therefore no need for an NDA), but equally sure that the employee will have to bear mounting legal fees and will not have a strong financial motive to seek punitive damages.
According to Robin Chater, Secretary-General of the Federation of International Employers (FedEE), “the rules of #MeToo are changing. It is coming down to the line as a complex financial struggle in which the taxman is unwittingly taking sides.”