By Paul S. Drizner and Michael D. Fleischer

Seyfarth Synopsis: The new Tax Act prohibits employers from deducting payments to individuals alleging sexual harassment or sexual abuse if the settlement or payment requires the Claimant to execute a nondisclosure agreement.

The #MeToo movement continues to have a significant impact on all employers, forcing human resource professionals to review their protocols for preventing, reporting and investigating sexual harassment claims. Now, Congress has passed the Tax Cuts and Jobs Act (the “Tax Act”), which may make sexual harassment settlements more expensive for employers who seek to keep these settlements private.

Under current tax law, an employer may deduct the ordinary and necessary expenses it incurs in carrying on its trade or business. This deduction generally includes legal settlements or payments to a plaintiff (including plaintiff’s attorney fees) and any legal fees the employer has incurred for its defense.

There has been an outcry by high profile victims’ advocates who have characterized confidentiality payments in settlements as “hush money” arguing that they mask inappropriate corporate conduct. In response, Congress included a provision in the Tax Act which is aimed directly at deterring employers from using nondisclosure agreements in sexual harassment settlements. Pursuant to new Internal Revenue Code Section 162(q), the government will no longer permit employers to deduct  “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.”

Implications and Challenges

New Section 162(q) has important implications for employers but there remain a number of questions regarding its application.   We expect the IRS to issue guidance in the future which will clarify some of the current ambiguities, but employers must devise a plan now for new legal settlements since Section 162(q) applies to payments made after December 22, 2017.

First, the price for confidentially just increased. When an employer settling a sexual harassment claim includes a nondisclosure provision in the agreement, it will be unable to deduct any payments related to the matter, including the settlement payment and attorney’s fees. This may backfire on the Plaintiff’s Bar, because there are certainly instances where the plaintiff desires confidentiality for a variety of reasons, including that publication of the agreement may make it more difficult for the plaintiff to find another job. In cases where the plaintiff desires confidentiality more than the employer, the employer may use this leverage to lower its settlement offer, essentially charging the plaintiff for the additional cost of confidentiality.

Second, the broad language of the statute makes it uncertain whether the IRS will consider payments made pursuant to a confidential agreement that does not settle sexual harassment claims but which contains a broad waiver of claims, including for sexual harassment, as “related to sexual harassment” and, thus, preclude the deduction. Unfortunately, we do not know the answer yet. Until this issue is clarified, employers may want to consider adding a provision to their settlement agreements by which the parties acknowledge that even though the claimant is waiving a broad range of potential claims, there was no claim of sexual harassment or sexual abuse and none of the settlement payments are related to such claims.

It is also unclear exactly which deductions the IRS is precluding in connection with the confidential settlement of a sexual harassment claim. The statute is clearly intended to apply to the settlement payment itself, as well as attorney’s fees. But what about other payments? If an employer hires an investigator or expert to assist with its case, are those costs deductible? What if the employer provides outplacement services for the plaintiff or pays the plaintiff’s COBRA premiums, are those costs deductible? Finally, if an employer has Employer Professional Liability Insurance and the insurance carrier makes the settlement and/or attorney’s fees payment, will the insurance company be denied a deduction for those payments? These are questions that will hopefully be answered with future official guidance. Plaintiffs often bring sexual harassment claims along with other discrimination claims like age and race. We will need the IRS to clarify whether a portion of the settlement may be allocated to sex harassment, so that the employer may deduct remaining payments.

Third, the statute explicitly provides that attorney’s fees related to the confidential settlement of a sexual harassment or sexual abuse matter are not deductible. This provision creates separate implications for both plaintiffs and employers.

We read the new statute to prohibit any deduction for an employer’s own attorney’s fees incurred for defense, or the payments made to the plaintiff’s attorneys. The provision would also seem to prohibit a plaintiff from deducting any attorney’s fees the plaintiff pays to his or her attorneys.   A plaintiff has income if the employer pays his or her attorney’s fees. In the past, a plaintiff was generally allowed to deduct the amount of the plaintiff’s attorney’s fees that the employer paid, resulting in no net income to the plaintiff for the attorney’s fees. The broad language of new Section 162(q) appears to change that general rule and prohibit a plaintiff from deducting the attorney’s fees the employer paid.   As such, the plaintiff may now owe tax on income that the plaintiff never received and this will significantly reduce his or her net recovery.

Although it is unlikely that Congress intended to place a tax burden on plaintiffs who raise sexual harassment claims, there is no clear guidance on these issues. As a result, until the IRS issues further clarification, plaintiffs may look to employers to cover their additional tax liability, which will add to the cost of settlement and make negotiations more difficult.

The result of all of this is that employers will have to carefully evaluate the cost/benefit of confidentiality. It will remain important to continue to monitor developments concerning the new tax law and incorporate the issues discussed above into the legal and financial analysis when settling cases involving sexual harassment or sexual abuse.

Seyfarth Shaw will provide further alerts as new developments occur.

For more information on this topic, please contact the authors, your Seyfarth Attorney, or any member of Seyfarth Shaw’s RetailTax, or Labor & Employment Teams.

By Sara Eber Fowler

Seyfarth Synopsis: Last minute scheduling change?  Want to make sure you have enough employees on stand-by to cover shifts?  In a growing number of areas around the country, that will cost you. 

Fair scheduling laws – sometimes referred to as “predictive” or “predictable” scheduling – are popping up in city councils and state legislatures across the nation. Typically affecting larger retail employers or fast-food establishments, the laws often require employers to post work schedules with advance notice and mandate a specified amount of “predictability pay” – such as one hour of pay for every four hours of scheduled work – if changes are made to an employee’s schedule on short notice.  These laws also tend to require predictability pay if employees are “on call” but not called in to work, and some restrict the ability to schedule employees for closing and opening shifts (“clopenings”).

San Francisco was the first to pass a law of this kind, which went into effect in July 2015. But in the past year, more states and cities have passed – or are considering – similar legislation.  In June, Oregon became the first state to pass a fair scheduling law (effective July 2018).  Emeryville, CA and Seattle enacted scheduling laws that went into effect July 1, 2017, and New York City’s recently passed ordinance will be enforceable as of November 26, 2017.

Other states and municipalities (including Congress) have introduced predictable scheduling legislation, including Arizona, California, Chicago, Connecticut, Maryland, Massachusetts, Minnesota, North Carolina, Ohio, and Washington, D.C. (Georgia, on the other hand, has taken the opposite approach, and passed a law that prohibits municipalities from passing a law that would require predictability pay.)

The theory behind these laws is that uncertainty in scheduling and last-minute scheduling changes wreak havoc on employees’ ability to plan for caregiving needs, hold second jobs or attend school, and plan their income. Several national retailers have already been forgoing “on-call” scheduling practices, irrespective of any legal mandate.

Retailers should be mindful of these new scheduling laws, particularly for those who have operations in affected jurisdictions. Bear in mind that each law varies.  In Seattle, for example, schedules must be posted 14 days in advance and employees are entitled to receive half-time pay for any shift they are “on-call” but not called to work.  New York City’s law, on the other hand, only requires schedules to be posted with 72 hours’ notice, but bans on-call scheduling altogether.

Many of the proposed and enacted laws also create an “interactive process” obligation – similar to the Americans with Disabilities Act – whereby employers are required to have a dialogue with employees about scheduling preferences and scheduling accommodation requests, and in some instances must grant such requests absent a bona fide business reason. They also generally prohibit retaliation against employees who request changes to their schedules.

Each statute also contains its own unique exceptions. Most do not require predictability pay if operational needs change due to natural disasters or other unforeseen changes, or if an employee requests a scheduling change, volunteers for a change, or swaps shifts.  Oregon’s law calls for the creation of a “voluntary standby list” of employees who may be called upon to work unexpected hours without receiving additional compensation.

Given the differentiation in these laws, employers with national retail operations should review their scheduling policies to ensure compliance with local laws and train management about the penalties associated with last-minute scheduling changes. For some, adopting a broad policy curbing on-call scheduling, providing advance notice of schedules, and creating voluntary “standby” lists may be helpful to comply with these varying laws with minimal interruption to business operations.

For more information on this or any related topic please contact the author, your Seyfarth attorney, or any member of the Absence Management & Accommodations Team or the Workplace Policies and Handbooks Team.