Congress Clarifies #MeToo Tax Provision

Earlier this year, in the wake of the #metoo movement and the growing number of men and women revealing a history of sexual harassment in employment and elsewhere, Congress passed a law as part of a sweeping tax reform bill that arguably prohibited plaintiffs from deducting their attorney fees as part of any settlement if the settlement agreement required confidentiality or non-disclosure. In the past, plaintiffs were able to take an above-the-line deduction for fees. For plaintiffs, the new law potentially carried serious monetary consequences.

In short, the law was a mess.

Many plaintiffs’ attorneys began to insist that if a defendant required confidentiality or non-disclosure, the defendant also had to agree to indemnify the plaintiff for any resulting tax consequences related to attorney fees. While some defendants agreed with the potential risks of the new law, other defense lawyers argued the law was not intended for private employment-related settlements and lawyers spent hours going around in circles. To indemnify or not to indemnify; that was the question.

Last Friday, after months of legal consternation, Congress signaled it intends to fix the issue once and for all. In a letter addressed to the Secretary of Treasury and the Acting Commissioner of the IRS, several Senate republicans acknowledged that the new tax law “arguably prohibits the recipient of any payment from deducting legal fees incurred in pursuing sexual harassment cases” and that “Congressional intent was that these attorney’s fees would not be subject to this rule.” The letter also indicated that technical corrections to legislation will be forthcoming.

With that, employment law practitioners breathed a sigh of relief. (At least for now).