For one, it is not uncommon for a plaintiff to accuse an employer of sexual harassment in addition to other forms of workplace discrimination such as race, age or disability bias, or even wage and hour law violations. Unfortunately, Congress has provided no guidance as to how settlements containing NDAs that are meant to resolve all claims in a single case involving multiple theories of liability should be treated. Will an employer be allowed to deduct any portion of a settlement that resolves an action in which sexual harassment is alleged, and if so, how much?

Should the parties to a confidential settlement be able to weigh the relative strengths and weaknesses of each theory of liability alleged, and apportion a settlement accordingly for purposes of making deductions subject to §162(q)?

Is there anything preventing an employer and employee from entering into multiple agreements containing NDAs wherein the bulk of the payout is attributed to non-sexual harassment claims (thus allowing the employer to take a deduction), while a token amount is attributed to sexual harassment claims (thus rendering negligible the impact of §162(q))?

And in regards to attorney fees, could an employer deduct any portion of attorney fees incurred where a payout conditioned on an NDA is meant to resolve multiple theories of liability, in addition to sexual misconduct?

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Unintended consequences for victims

Notwithstanding the countless unresolved questions about how §162(q) will be applied and enforced, the new rule may have additional unintended, negative consequences for victims of workplace sexual misconduct.

For instance, NDAs can act not only as a “shield” for employers guarding against so-called “copycat” claims, but also as a powerful “sword” wielded by an employee who can control whether or not explosive, reputation-tarnishing allegations become public. As such, the notion that an accuser will enter into an NDA is often a driving force behind large settlements paid to victims of sexual misconduct; taking away this weapon could actually drive down the settlement value of such cases. Similarly, employers analyzing settlements from a cost-benefit perspective may be unwilling to offer as much to resolve workplace sexual misconduct allegations knowing that such a payout will not be tax deductible if they want an NDA.

Furthermore, employers who deem an NDA to be “off-the-table” may be less inclined to resolve cases pre-litigation or at an early stage of litigation, and may choose instead to “dig in their heels” and litigate a case to judgment in the hopes that they can clear their names. This arguably further penalizes victims of workplace sexual misconduct by causing them to have to relive traumatic experiences over and over throughout the course of a lengthy and expensive litigation, with no guarantee of success.

Of course, on the other hand, some employers who want an NDA may be more inclined to resolve a case early on before their attorney fees escalate given that §162(q) prohibits them from taking a deduction for attorney fees, which would certainly benefit victims of workplace sexual misconduct (perhaps at the expense of defense attorneys).

While Congress deserves some adulation for attempting to think “outside-the-box” and revise the tax code to punish employers who engage in workplace sexual misconduct, there is much uncertainty and confusion about the real-world, practical implications of §162(q). While only time will tell, it is quite possible that this well-intentioned amendment to the tax code ultimately backfires and leads to unintended, negative consequences to victims of workplace sexual misconduct.