Wyatt Employment Law Report

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The Tax Cuts and Jobs Act Makes Some Settlements More Expensive for Employers

By Michelle D. Wyrick

A little-known provision in the Tax Cuts and Jobs Act should be of great interest to employers.  In response to the #MeToo movement and the recent surge of sexual misconduct allegations, Congress included a provision in the Act that precludes employers from deducting (1) settlements or payments relating to sexual harassment or abuse if the settlement or payment is subject to a nondisclosure agreement or (2) attorneys’ fees relating to such a settlement or payment.  The provision applies to amounts paid or incurred after December 22, 2017.

Previously, employers could deduct as ordinary and necessary business expenses all settlement payments arising out of a business matter as well as related attorneys’ fees.  The new law will make sexual harassment settlements more expensive for employers who include confidentiality provisions in their settlement agreements.  Employers will have to choose between deductibility and confidentiality.

The Internal Revenue Service (“IRS”) is expected to issue guidance to clarify some of the questions surrounding the new law.  For example, it is not clear whether an employer can deduct payments relating to a confidential settlement agreement that contains a broad release of claims, including claims for sexual harassment, even if no actual sexual harassment claims were asserted in the underlying litigation.  And, if a confidential settlement agreement settles litigation involving sexual harassment claims and other claims, can the settlement payments be apportioned among claims, allowing the employer to deduct a portion of the settlement payment?

Until the IRS weighs in, employers should tread carefully in this area and consider the potential added tax burden of settling sexual harassment claims.  In some circumstances, employers may deem confidentiality to be worth the extra cost.  One thing is clear – settling sexual harassment claims on a confidential basis just got more expensive.

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Lack of Regular Sexual Harassment Training Could Deprive Employers of Defense to Claims Even if Employee Never Complained

By Sharon L. Gold

Have your employees recently been trained on sexual harassment?  Is your sexual harassment policy conspicuously posted?  Does your policy have a reasonable complaint mechanism?  If the answer is “no” to any of these questions, then you may be depriving your company of a defense to certain sexual harassment claims.

When an employer is sued by an employee alleging hostile work environment sexual harassment by a supervisor, the employer can defend against the claim if the employer can prove that: 1) the employer exercised reasonable care in preventing and correcting any sexual harassment; and 2) the employee unreasonably failed to take advantage of the preventative or corrective measures.  Taking its name after the two Supreme Court cases where the affirmative defense was created, the defense is called the Faragher/Ellerth defense.

In Pullen v. Caddo Parish School Board, —F.3d —, 2016 WL 3923867 (5th Cir. July 20, 2016), the Fifth Circuit recently held that the Faragher/Ellerth defense was not available because, among other reasons, the employer had not recently trained its employees on sexual harassment.  Continue reading

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Kentucky Court of Appeals Upholds $6 Million Verdict

By Debra Dawahare

            In a published decision issued on November 20, 2009, the Kentucky Court of Appeals has upheld the Bullitt Circuit Court’s award of over $6 Million to two former employees of the Mt. Washington McDonald’s.  In its decision in McDonald’s Corporation v Ogborn, the court considered a truly bizarre situation.

   Between 1994 and 2004, an unknown hoaxer called fast food restaurants across the county, pretending to be a police officer.  He convinced restaurant managers, employees, and outsiders to conduct strip searches and even sexual assaults upon victims the hoaxer had apparently pre-selected.  The hoax was carried out more than 30 times at different McDonald’s restaurants, including several in Kentucky.  According to the court’s opinion, McDonald’s legal department was aware of and had documented these facts, but the company nevertheless failed to warn or train its employees about this hoax, or to prepare them to respond appropriately so as to prevent the hoax from being repeated.

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