Increase in Sexual Discrimination, Harassment, and Assault Claims
The current media attention being directed towards recent allegations (and in some cases admissions) of sexual discrimination, harassment, and/or assault by members of Congress, faculty or staff at educational institutions, and high-profile individuals in the media, sports and entertainment industries, as well as the resulting “#metoo” social media movement, are understandably increasing the incidence of claims against employers. The financial cost of such claims would be increased by the enactment of the following proposed changes in the tax laws.
Under current tax laws, compensation to victims and related attorney fees paid by a company in settlement of sexual discrimination, harassment, and/or assault claims are tax deductible. The proposed “TAX CUTS AND JOBS ACT” recently reported out of the Committee on Finance and currently being considered on the Floor of the United States Senate would disallow tax deductions for “any settlement, payout, or attorney fees related to sexual harassment or sexual abuse if such payments are subject to a nondisclosure agreement.”
Other more sweeping changes in the federal tax laws applicable to such payments are also being proposed. Rep. Suzan DelBene (D-Wash.) has announced that she is planning to introduce legislation that would eliminate the tax deductibility of settlement costs or attorney fees paid in settling any sexual harassment case involving an employee, according to a statement from Ms. DelBene's office. This bill would also exempt from taxation to the recipient, all payments made on account of sexual misconduct whereas under current law only payments on account of physical injury or physical sickness are exempt from taxation.
Finally, Rep. Barbara Comstock (R-Va.) recently sent a letter to Treasury Secretary Steven Mnuchin asking the department to review how frequently businesses deduct costs associated with sexual misconduct claims. The result of that review could lead to further legislative or administrative proposals.
In response to these accelerating developments, businesses, educational institutions, and other employers should immediately consider taking the following steps:
- Review and revise as necessary the sexual discrimination, harassment, and assault prevention policies and complaint procedures;
- Ensure that the sexual discrimination, harassment and assault prevention policies are recirculated to employees, and are available for review by employees on employee bulletin boards, the intranet, and in the employee handbook;
- Train managers on the expectations that this type of misconduct will not be tolerated and how they should respond if they witness or hear about it;
- Train human resources professionals or operational managers tasked with the responsibility regarding how to handle complaints of sexual discrimination, harassment and abuse, including that such complaints must be handled with a sense of urgency;
- Ensure that retaliation is prohibited against employees who decide to come forward and make a complaint;
- If your environment is one that tolerates such behavior, consider resetting the tone and culture from the top down so that employees understand that a line has been drawn in the sand and that such behavior will not be tolerated going forward;
- Review pending and threatened cases to determine if an acceptable settlement can be arrived at before the enactment of the proposed tax law changes; and
- Review pending settlements in which payments are scheduled to be made in the future, determine if accelerating such payments is feasible and, if so, whether acceleration would result in significant tax savings in the event that the proposed tax law changes are enacted.