February 15, 2018
Gibbons Employment & Labor Law Special Alert

The subject of litigating and settling sexual harassment and abuse claims has become a lightning rod for federal and state legislators. With the passage of the new Tax Cuts and Jobs Act (the “Act”), the settlement of sexual harassment or sexual abuse claims creates a significant practical dilemma for employers. The Act adds Section 162(q) of the Internal Revenue Code (IRC), providing that “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.” Consequently, when settling sexual harassment or sexual abuse claims, employers need to choose between the protections of confidentiality obligations imposed on the settling employees and tax deductions for the settlement payments. Other complexities include (i) the definition of sexual harassment and sexual abuse (i.e., whether a hostile work environment allegation falls under the definition of sexual harassment for purposes of Section 162(q)) and (ii) the definition of employers or payers subject to this prohibition under the Act. Yet another wrinkle for employers is how to resolve the issue of confidentiality when settling employees take the position that they will not be able to take deductions for their attorneys’ fees unless there are no confidentiality provisions.

The new legislation has sparked proposed changes at the state legislative level in New York, New Jersey, California, and Pennsylvania. The following states proposed legislation or initiated government focus on the issue of sexual harassment and abuse settlements:

  • New York: Governor Cuomo has proposed legislation that prevents the use of taxpayer dollars to fund individual sexual harassment settlements with public officials. The Administration has proposed a mandate for private companies that do business with the state to report sexual assault and harassment statistics to prevent secrecy. Another proposal would void forced arbitration policies or clauses in employee contracts that prevent sexual harassment cases from consideration in law enforcement investigations and trials. Lastly, another proposal would prohibit confidentiality agreements relating to claims of sexual assault or harassment for all branches of government unless the express preference of the victim is otherwise.
  • New Jersey: The proposed New Jersey statute would ban confidentiality agreements or provisions in settlement agreements that conceal details relating to claims of discrimination, retaliation, or harassment. Also, an employer under the proposed statute is prohibited from retaliating against an individual who refuses to enter into an agreement that violates the confidentiality ban. If an employer tries to force an agreement or provision in a settlement agreement that would violate the proposed statute, the employer could be forced to pay reasonable attorney’s fees related to the litigation. The statute of limitations for a claim under the New Jersey proposed law is two years.
  • California: New California legislation, called the STAND (Stand Together Against Non-Disclosure) Act, prohibits confidentiality provisions in settlement agreements in cases involving sexual assault, sexual harassment, and sex discrimination. Another piece of proposed legislation would prohibit arbitration agreements that require employees to pursue sexual harassment claims through arbitration.
  • Pennsylvania: The proposed Pennsylvania statute would prohibit nondisclosure obligations for the settlement of civil claims for sexual harassment or sexual abuse.

An employer that is unaware of these changes could subject a confidentiality obligation to later challenge by a party to the settlement.

With the new legislation being introduced, it is crucial for employers to ensure their nondiscrimination and non-harassment policies are up-to-date and to implement sexual harassment training for managers and employees.