On December 22, 2017, President Trump signed a sweeping tax bill (the "Tax Cuts and Jobs Act" or "Act") that overhauls much of the United States tax code and touches almost every section of the country's economy. Hidden within the more than 1,000 pages of the recently-passed GOP tax plan is a relatively small provision suddenly getting a lot of attention from employers and their counsel.

Section 13307 of the Act – titled "Denial of Deduction for Settlements Subject to Nondisclosure Agreements Paid in Connection with Sexual Harassment or Sexual Abuse" – was, as its name suggests – added in an effort to address corporate settlements involving claims of sexual harassment and abuse. Nicknamed "the Weinstein tax" or the "#MeToo tax" by some analysts, the amendment is already generating a lot of questions on the part of both employers and plaintiffs' attorneys.

Under old Internal Revenue Code Section 162, companies were permitted to deduct ordinary and necessary expenses of conducting business, with certain exceptions. Employers relied on this deduction to deduct settlement payments to employees and attorneys' fees and costs incurred in defending such claims. New Section 162(q) (effective December 22, 2017) now provides:
 

• "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."

The obvious intent of the provision, which will force negotiating parties to choose between non-deductibility of a settlement payment and non-disclosure of the settlement, is to provide a strong disincentive to confidentiality provisions in certain settlement agreements. And, eliminating what can sometimes look like "gag orders" on victims of harassment and abuse sounds, at first listen, like an inherently good thing. However, potential liability is just one of many reasons why a company or individual may choose to settle a case. Indeed, the time and money spent on litigation – regardless of whether any improper conduct has occurred – is often the most significant driver of monetary settlements. In addition, confidentiality may be as valued (or even more valued) by the plaintiff/claimant as it is by the defendant. New Section 162 does not appear to contemplate these kinds of scenarios and considerations.

New Section 162 also raises a number of more practical questions about its effect on standard settlement agreement language. Until now, for example, it has been normal practice in employment-related settlement agreements to include both a broad, general release of claims as well as a confidentiality provision restricting the employee from discussing the terms and even the existence of the settlement agreement. The general release typically includes all claims the employee is permitted to release, including claims based on sexual harassment and sex discrimination under federal, state, and local anti-discrimination laws. Accordingly, the release and confidentiality provisions typically included in every employment-related settlement agreement will apply to claims of sexual harassment or abuse even if the employee has not raised any such claims.

Significantly, the Conference Report accompanying the statute does not include any helpful guidance regarding the meaning of "related to sexual harassment or sexual abuse." As a result, it is not at all clear how the provision should be applied in cases involving multiple claims by a plaintiff, including claims that may be "related to sexual harassment or sexual abuse." Likewise, it is not yet clear whether Congress intended for this limitation to apply whenever such allegations are made versus where an allegation of misconduct is supported or has been proven by factual evidence.

Until these questions and concerns are addressed in Treasury or IRS interpretive guidance, employers should carefully consider the effect of the provision's plain text in their planning and involve legal counsel early when drafting settlements and other agreements. For example, if only some of a plaintiff/claimant's allegations concern sexual harassment or abuse, employers may want to work with their counsel to allocate settlement payments to claims other than sexual harassment or sexual abuse and possibly deduct portions of settlement payments (and related attorneys' fees) associated with those claims.

It is important to note that states are also considering laws prohibiting settlement agreement confidentiality provisions. Legislation recently proposed by a California state senator would prohibit anyone accused of sexual assault, harassment, or discrimination in the workplace from settling allegations with an agreement that includes a confidentiality provision. California SB-820, which is co-sponsored by the Consumer Attorneys of California and the California Women's Law Center, would ban the inclusion of nondisclosure terms in settlement agreements and would apply to both private and public employers in California.

When it comes to many employment-issues, California often leads the pack in enacting provisions protecting employees. Indeed, similar bills are also being considered by the state legislatures in Arizona, New Jersey, New York, Pennsylvania, and Washington State. Accordingly, employers are likely to see other states and localities follow the lead of California and other states and attempt to restrict the inclusion of confidentiality restrictions in settlements of sexual harassment and abuse cases.