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Tax Law on Settlements

In light of the recent news, the question of how sexual misconducts are addressed has been reexamined. Most importantly, the perception by various institutions of victims regardless of the gravity of the event or the time that it took them to report the incident is changing. The #metoo movement is a revelation of how deep this roots in our society and how long victims have been silent.

Victims of sexual harassment who sue and successfully win monetary settlements can be forced to pay taxes on the full amount of the money received under the new tax law regardless of the portion taken as lawyers’ fees. In clear the victim is paying additional taxes on money that they do not actually have. The New Tax Law was signed on December last year and significantly impacts disbursements of sexual harassment claims through denying tax deductions for the payments that are subjected to non-disclosure agreements paid in line with sexual abuse or sexual harassment.

What’s Non-Disclosure Agreement?

Non-Disclosure Agreement is precisely what it sounds like. This is a type of agreement wherein the parties involved agree not to disclose particular information. In case of sexual abuse or harassment settlements, non-disclosure agreement will prohibit parties from talking about the case with anybody. In some instances, individuals might be prohibited even from acknowledging the existence of non-disclosure agreements.

When narrowly examined, this does not sound like a big deal because usually people want to forget what happened if given a choice. However, the sad reality is that this binding contract has more implications that can be damaging for victim. For instance, victims of a repeat offender cannot help each other to stop the perpetrator. They cannot testify when asked by fear to be sued. This is what we witnessed with high profile offender such as Harvey Weinstein who have been continually attacking women using his position.

This law eliminates the ability of the payer to take deductions for payments of harassment settlements if settlements are subjected to non-disclosure agreements as intended but it has not been corrected to protect the complainant.. This new tax law states that no deduction will be allowed for any payment that is related to sexual abuse or harassment if such payment is subjected to non-disclosure agreement for both parties. Nevertheless, as a practical matter, this new tax law might have unintended and adverse consequences for victims. Abusers may generally insist on confidentiality provisions despite this new tax law to prevent the possibility of encouraging claims or litigation from the victims who may otherwise hear about the settlement payments in the absence of the non-disclosure agreement.

Rather than its desired effects, this new tax law makes it more challenging for victims of sexual harassment in the workplace to negotiate more significant settlements as employers factor in the cost of disallowed deductions of tax. Claims on sexual harassment do not usually come alone. These are mixed with other types of employment law claims like employment discrimination, employment law tort claims, retaliation and more. But what if the settlement includes sexual abuse claim along with other employment law claims that are not covered by the new tax law’s disallowance of deductions? Unless the Congress amends or repeals this law, we have to work hard in developing best practices to deal with the new complexities.

Contact us for more information about your situation.

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