Weinstein Tax Introduced to Impact Confidentiality of Settlement Agreements

On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law by President Donald Trump. In light of the #metoo movement and heightened awareness surrounding sexual harassment and abuse, the Act includes Section 13307, which has come to be known at the “Weinstein Tax.” The Weinstein Tax is actually a misnomer; it is not a tax at all, but rather, it prohibits settlement funds or attorneys’ fees arising out of confidential settlement agreements from being deducted from taxes. Proposed by Democratic Senator Bob Menendez, the Weinstein Tax is an effort to protect the victims of sexual harassment and abuse by incentivizing employers/insurers not to demand confidentiality during settlement negotiations.

Employers/Defendants must now weigh the tax implications when contemplating settlement of a sexual harassment or abuse claim. However, there are some issues with how the Act is currently constructed. First, a confidentiality agreement would almost always outweigh any negative tax implications with smaller settlement payment amounts, which are typically the most common sexual harassment or abuse claims. The Act is written broadly enough that a reasonable interpretation would include plaintiffs being prohibited from deducting their settlement payments or attorneys’ fees. As a result, plaintiffs may ultimately receive lower settlement payments or be unable to resolve cases.