The ‘Me Too’ Movement and its Influence on Your Business Taxes
by David B. Walston, Partner
A claim of “hostile environment” sexual harassment is a form of sex discrimination that is actionable under Title VII, and claims for a sexually hostile work environment have been around since the late 1970s (and recognized by the U.S. Supreme Court in 1986). For years, employers have adopted and modified workplace policies and practices designed to prevent the creation of a sexually-hostile work environment. As the law has evolved, so have the policies and practices. Not all efforts are successful: some employees may ignore the prohibitions against certain conduct and mistreat other employees, or an employee believes another employee has failed to abide by the policies and seeks to hold the employer responsible. Whatever the case, EEOC charges and lawsuits may follow.
In the last five years, the number of sexual harassment charges filed annually nationwide has remained static, hovering around the 6,500 mark. There are no statistical surveys about the number of sexual harassment lawsuits filed, but we have not observed any significant increase here in Alabama. The “Me Too” movement has re-focused attention on sexual harassment in the workplace, and we anticipate an increase in the number of charges and lawsuits filed in 2018.
But this is not the only impact of the “Me Too” movement.
Statistical surveys show that nationwide, employers and employees settle over 75 percent of discrimination lawsuits filed (which include discrimination and retaliation claims in addition to sexually hostile environment claims). Employers settle employment litigation for a multitude of reasons. The employer may have a “bad actor.” At times, there may be issues with evidence or witnesses. An employer may face social pressure to resolve a lawsuit. In most cases, however, settlements are driven by economics. Simply put, it costs less to settle than to fight. To fight requires an employer to pay its own attorney to defend the case. Defending litigation has intangible burdens such as the time and resources management has to spend away from productive work for strategy meetings, depositions, and possibly trial. The potential liability is also high: an employer who loses a hostile work environment claim at trial faces the payment of a large back pay and front pay award, up to $300,000 in compensatory and punitive damages, and the fees for the employee’s attorneys.
Until this year, employers settling hostile work environment claims could find some solace in the fact that the settlement proceeds could be deducted for tax purposes. The Tax Cuts and Jobs Act, signed in to law on Dec. 22, 2017, has eliminated this deduction, providing:
Payments related to sexual harassment and sexual abuse – No deduction shall be allowed under this chapter for –
- Any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement; or
- Attorney’s fees related to such a settlement or payment.
In summary, this provision:
- Requires an employer to choose between a tax deduction for the settlement proceeds or a nondisclosure agreement; and
- As written, eliminates entirely the deduction for payment of a fee to the employee’s attorney – regardless of whether the settlement includes a nondisclosure agreement.
The allocation of settlement amounts – wages, non-taxable versus non-taxable damages and the amount of attorney’s fees – has always been a point of contention between employers and employees. The Tax Cuts and Jobs Act adds several new points of contention to potential settlements. The foremost question for employers should be “is the nondisclosure agreement worth more than my tax deduction?”