The High Cost of NDAs in the Age of #MeToo: What Every Employer Must Know About the New Tax Law.

Last year, the use of non-disclosure provisions and agreements (“NDA”) in the workplace came under fire since, according to proponents of the #MeToo movement, their unintended effect in the settlement of sexual harassment and abuse claims was to silence victims and enable serial harassers to strike again and again. In response, federal legislators included a NDA deterrent within the Tax Cuts and Jobs Act of 2017 (the “Act”) which signals that, in the sexual harassment and abuse context, the routine inclusion of NDAs may soon become a thing of the past. NDAs, the Act, & It’s Impact. For years, companies have routinely included non- disclosure provisions in employment, settlement and severance agreements to protect valuable assets like confidential information, trade secrets, and business reputation. These provisions normally require at least one of the parties agree not to disclose the terms or even the existence of the agreement and instead promise to keep it private and confidential. Under the then existing US Tax codes, companies could then treat the settlement payments as a deductible business expense to reduce their tax liability. The Act, which went into effect in January of 2018, changes this. The Act prohibits companies from claiming the settlement amounts paid or incurred after December 22, 2017 and any associated attorneys’ fees as a business expense whenever the company requires a person enter into a non-disclosure agreement related to his or her claim of sexual harassment or sexual abuse. Specifically, the Act adds the following Section 162(q) to the Internal Revenue Code: (q) PAYMENTS RELATED TO SEXUAL HARASS- MENT AND SEXUAL ABUSE.—No deduction shall be allowed under this chapter for— (1) any settlement or payment related to
sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement, or (2) attorney’s fees related to such a settlement or payment. Accordingly, the Act forces companies to choose between being able to claim sexual harassment and abuse related settlement payments and attorney’s fees as deductible business expenses and requiring the victim agree to an NDA. Thus, although the Act does not prohibit the use of NDAs, it does make it less enticing for companies to continue using them in the sexual harassment and abuse context.