Part of Our Series on the Tax Cuts and Jobs Act of 2017

The Tax Cuts & Jobs Act of 2017 adds a new provision to the Code, section 162(q), that eliminates deductions for settlement payments related to sexual harassment or sexual abuse “if such settlement or payment is subject to a nondisclosure requirement.”

  • The new provision also prohibits, in a separate subsection, deductions for attorney’s fees “related to such a settlement or payment.”
  • Thus, if an employee asserts a claim of sexual harassment against a coworker or supervisor, and the employer enters into an agreement to settle the claim that includes a standard confidentiality provision, neither the amount of the settlement nor any amount of the settlement allocated to attorneys’ fees can be deducted as a business expense.
  • The provision applies to payments made after December 22, 2017.

The new provision leaves several questions unresolved:

  • It does not include a definition of the phrase “related to sexual harassment or sexual abuse,” which creates uncertainty about the scope of the new prohibition, especially as applied to settlement agreements covering multiple types of employment claims in addition to sexual harassment or abuse claims.
  • It is also unclear, because of the structure of the new provision, whether the denial of a tax deduction for legal fees is independent from or contingent upon the presence of a nondisclosure clause.
  • It is unclear how the term “nondisclosure agreement” will be interpreted; for example, whether it will reach nondisparagement clauses.
  • Traditionally, plaintiff-employees have been permitted an above-the-line deduction for attorneys’ fees related to their employment claims. The new provision purports to disallow any deduction for any party to the settlement. The Act’s drafting history arguably supports a narrower interpretation, but it is hard to predict how IRS will interpret the plain language of the new provision.
Photo of Lindsay Burke Lindsay Burke

Lindsay Burke co-chairs the firm’s employment practice group and regularly advises U.S., international, and multinational employers on employee management issues and international HR compliance. Her practice includes advice pertaining to harassment, discrimination, leave, whistleblower, wage and hour, trade secret, and reduction-in-force issues arising…

Lindsay Burke co-chairs the firm’s employment practice group and regularly advises U.S., international, and multinational employers on employee management issues and international HR compliance. Her practice includes advice pertaining to harassment, discrimination, leave, whistleblower, wage and hour, trade secret, and reduction-in-force issues arising under federal and state laws, and she frequently partners with white collar colleagues to conduct internal investigations of executive misconduct and workplace culture assessments in the wake of the #MeToo movement. Recently, Lindsay has provided critical advice and guidance to employers grappling with COVID-19-related employment issues.

Lindsay guides employers through the process of hiring and terminating employees and managing their performance, including the drafting and review of employment agreements, restrictive covenant agreements, separation agreements, performance plans, and key employee policies and handbooks. She provides practical advice against the backdrop of the web of state and federal employment laws, such as Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, the Equal Pay Act, the Family and Medical Leave Act, the Fair Labor Standards Act, and the False Claims Act, with the objective of minimizing the risk of employee litigation. When litigation looms, Lindsay relies on her experience as an employment litigator to offer employers strategic advice and assistance in responding to demand letters and agency charges.

Lindsay works frequently with the firm’s privacy, employee benefits and executive compensation, corporate, government contracts, and cybersecurity practice groups to ensure that all potential employment issues are addressed in matters handled by these groups. She also regularly provides U.S. employment law training, support, and assistance to start-ups, non-profits, and foreign parent companies opening affiliates in the U.S.

Photo of Tom Plotkin Tom Plotkin

Tom Plotkin advises clients on a range of domestic and international labor and employment issues. His domestic practice focuses on hiring and firing, discrimination, harassment, whistleblower, wage and hour, trade secrets, non-competition, and other issues arising under federal and state employment laws. His…

Tom Plotkin advises clients on a range of domestic and international labor and employment issues. His domestic practice focuses on hiring and firing, discrimination, harassment, whistleblower, wage and hour, trade secrets, non-competition, and other issues arising under federal and state employment laws. His international practice involves assisting companies in developing strategies and policies for managing cross-border workforces.

Mr. Plotkin also focuses on a number of cutting edge issues at the intersection of employment law and workforce management. As part of Covington’s Business and Human Rights Initiative, Mr. Plotkin assists companies in complying with global laws aimed at monitoring forced and trafficked labor in international supply chains. He also frequently partners with white collar colleagues to conduct internal workplace culture assessments and audits in the wake of the #MeToo movement.