Beware of the Weinstein Tax

How the New Tax Bill Affects Sexual Harassment Settlements
Joshua Y. Joel

The recently passed Tax Cuts and Jobs Act, in a nod to the #metoo movement and increased awareness of workplace sexual harassment and issues of sexual abuse, includes what has become known as the “Weinstein Tax.” The Weinstein Tax, originally proposed by Democratic Senator Bob Menandez, is not a tax at all. Rather, Section 13307 of the Act, prohibits settlement funds or attorneys’ fees paid out pursuant to confidential settlement agreements from being deducted from taxes. In an effort to curb the use of settlement agreements that muzzle those who raise claims of sexual harassment or abuse, the provision was intended to protect the victims and incentivize employers not to demand confidentiality. Specifically, Section 13307 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.

When faced with a sexual harassment claim—whether meritorious or not—employers must now consider the tax implications of contemplating settlement. For many, if not most sexual harassment claims, the potential risks of not including a non-disclosure provision will outweigh any tax benefits. This is especially true in cases that do not involve significant settlement payment amounts, as it is usually far more beneficial to keep any claims confidential then to receive the deduction. Therefore, the provisions effect on these agreements is questionable.

Interestingly however, the new law, while apparently intended to target only employers, is written broadly enough that it may prohibit plaintiffs from deducting their settlement payments as well. In fact, under the Act as written, victims of sexual harassment or abuse may need to pay taxes on the full amount of settlement payments, and even for their attorneys’ fees. This may result in a lower settlement for plaintiffs, and create the opposite effect than what was intended.

It remains to be seen how the IRS will interpret the law, or whether Congress will issue technical corrections. Meanwhile, employers should be aware of this new development. If you find yourself in the unfortunate situation of defending a sexual harassment claim consider involving your companies tax professional or at the very least consider the tax implications.

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