Category Archives: Wyoming

September 12, 2023

How to Address Damage to Company or Customer Property

Laurie Rogers

Question: Can we legally require employees to reimburse the company for damage to customer or company property (i.e., the full amount of damages or insurance deductible)?

Answer: Many employers have policies requiring employees to reimburse them for damage to company property, usually through payroll or final paycheck deductions. Before implementing such a policy, you must consider state and federal laws that may restrict or prohibit your ability to make such payroll deductions. Read more >>

January 17, 2023

The Latest on the Wyoming Legislature’s Employment Proposals

Janae Ruppert

By Janae Ruppert

The Wyoming Legislature began the 2023 General Session on January 10, 2023. At this early stage of the session, only two employment related bills have been introduced.

Prohibiting Mask, Vaccine and Testing Discrimination. House Bill 66, entitled “Prohibiting mask, vaccine and testing discrimination” seeks to prohibit discrimination based upon a person’s vaccination status, medical testing status, or use of a facial covering (i.e. mask). This bill is not limited to defining new categories of discrimination in the workplace but would prohibit imposing masking, testing or vaccination requirements as a condition for accessing publicly available goods and services. Notably, the bill is not limited to COVID-19, but extends to testing, masking or vaccination for any communicable disease. The bill would also repeal the immunization requirements for children and childcare and school employees. Read more >>

July 22, 2022

Very Bad Year for Wyoming Noncompetes (And What You Can Do To Improve Yours)

by Brad Cave

Brad Cave

The Wyoming Supreme Court decided four cases in the last 12 months against the enforcement of employees’ agreements not to compete with their former employer. Although each case was unique, the tenor and direction of these decisions are bad news for Wyoming employers who rely on noncompete agreements. In addition, one of the rulings requires Wyoming employers to immediately review the reasonableness of the geographic scope and time covered by their noncompete agreements and perhaps modify those terms, or they risk being unable to enforce the agreement at all. You should act now to improve your odds of enforcing the agreements against disloyal former employees. Here’s our take on the steps you should take.

Confirm your noncompetes are supported by consideration

Contracts must be based on consideration—something of value—exchanged between the parties. All employees have employment contracts with their employers, which are supported by consideration of the job itself with its promise of payment of wages. When noncompete agreements are signed at the time of hiring, the job is the consideration. When an employer asks employees to sign a noncompete after employment begins, they must give new consideration beyond just keeping the job. Consideration can consist of anything of value that is specifically offered and accepted in exchange for the noncompete, but without new consideration, the post-hire noncompete is not enforceable. Read more >>

December 21, 2020

Rumors, Innuendo Lead Wyoming Highway Patrol to Face Sexual Harassment Trial

by Brad Cave

Brad Cave

Most people know overtly sexual comments are likely to violate their employer’s rules and could lead to sexual harassment claims. But many don’t understand the comments are a problem not just because they’re sexual. That’s because the sexual content can be used as evidence to show other nonsexual negative treatment was motivated by discriminatory intent. As a result, the sex-based misconduct is just one aspect of the working environment you must consider—whether overtly sexual or not—to determine whether an employee was subject to a hostile work environment.

In the following opinion from the 10th Circuit, you can learn more about how employees should be trained to avoid harassment and how supervisors should deal with rumors and other inappropriate behavior. Read more >>

April 2, 2020

10th Circuit Upholds Hospital’s Rejection of Applicant Under ADA

Mark Wiletsky

by Mark Wiletsky, Holland & Hart LLP

The rules surrounding medical examinations under the Americans with Disabilities Act (ADA) can be tricky. The U.S. 10th Circuit Court of Appeals (whose rulings apply to all Colorado, New Mexico, Utah, and Wyoming employers) recently analyzed the rules in a case involving an employer’s decision to rescind a job offer based on a postoffer, preemployment medical examination. The lessons learned are helpful for all employers that use or consider medical examinations for applicants or employees.

Facts

Elena Sumler applied for a job as a sonographer with the University of Colorado Hospital Authority. Sonographers use their technical skills to obtain and analyze ultrasound images.

The hospital offered Sumler the position, contingent on a medical examination. As part of the medical exam process, she disclosed that she suffers from fibromyalgia and was taking medications, including two narcotic pain medications. She asserted, however, that she wasn’t disabled and had no restrictions preventing her from performing the essential job functions. Read more >>

November 20, 2018

Sexual Harassment Cases Provide Concrete Reason to Change Corporate Culture

Brad Cave

By Brad Cave

Sexual harassment can affect your workplace in many significant ways—for example, by lowering morale, increasing absenteeism and turnover, and decreasing productivity. But those consequences are often difficult to measure and quantify, making it harder to show how they affect your company’s bottom line. Real dollars and cents in the form of jury awards and settlements with employees who have sued their employers for fostering a hostile work environment are more easily understandable and can be persuasive when you need to justify expenditures designed to reduce harassment in your workplace.

A survey of sexual harassment awards and settlements in cases involving the Equal Employment Opportunity Commission (EEOC) in federal courts within the U.S. 10th Circuit Court of Appeals (which covers Wyoming, Colorado, Kansas, New Mexico, Oklahoma, and Utah) offers insight into how much money can be at stake in sexual harassment lawsuits. In addition to the monetary penalties noted in the chart at the bottom of this article, settlement terms often include numerous nonfinancial requirements, such as providing harassment training to supervisors and employees, updating policies and practices, apologizing in writing to the victimized employee, posting notices in the workplace about employees’ right to be free from harassment, and continued EEOC monitoring of your company’s practices.

And keep in mind that in addition to any financial award or settlement, you will incur the costs associated with defending sexual harassment claims. Not only do the attorneys’ fees add up, but supervisors, HR personnel, and others must take time away from their regular tasks to participate in investigations, depositions, and trial preparation. In short, the ramifications of sexual harassment in the workplace are significant, not only in financial terms but also in terms of distractions to your business operations and lost productivity.

Update your approach to sexual harassment

In its newly released statistics for fiscal year 2018, the EEOC reported a 13.6 percent increase in sexual harassment charges over the previous year and a 50 percent increase in lawsuits that include allegations of sexual harassment. In addition, the EEOC noted that its sexual harassment webpage has seen double the number of visits since the #MeToo movement gained momentum one year ago. As employees become more willing to come forward with harassment complaints and public scrutiny continues to damage companies’ reputations, it’s more important than ever to revisit and update your approach to handling and eliminating sexual harassment in your workplace.

On October 31, the EEOC held a public meeting titled “Revamping Workplace Culture to Prevent Harassment” at its headquarters in Washington, D.C. Stakeholders who spoke at the meeting stressed the need for leadership and accountability throughout the organization when workplace harassment is being addressed. According to EEOC Acting Chair Victoria A. Lipnic, “Over the past year, we have seen far too many examples of significant gaps in both areas. Our witnesses [at this meeting] stressed how both leadership and accountability must also be driven throughout an organization from the line employees, to the supervisors, to the CEO, and to the Board.”

Change your culture

So how does an organization change its culture? It has to come from the top. Company leaders and executives must set the tone by assuring employees that sexual harassment will not be tolerated. No one must be exempt from that zero-tolerance approach, no matter how important the individual is to the organization.

Complaints must be taken seriously, and employees who come forward should be treated with respect. If you find that harassment occurred, you must mete out significant consequences for the perpetrator and provide appropriate remedies for the aggrieved employee. Allegations must not be swept under the rug, and the perpetrator shouldn’t be permitted to hide behind a confidential settlement and continue working at the organization, creating the possibility that he or she may harass others in the future.

Changing your culture also requires executives, managers, and supervisors lead by example. Their actions and behavior must be irreproachable, never crossing the line into potential gray areas of sexual harassment. Yes, that means that folks in positions of power may need to rethink their jokes and refrain from certain types of banter. But never crossing the line will show the rest of the workforce that inappropriate behavior is unacceptable.

Encourage bystander intervention and reporting

Victims of sexual harassment often feel ashamed or traumatized, leaving them unable or unwilling to report what happened to them. One way to ensure that workplace incidents get reported is to make it every employee’s responsibility to report what they see and hear at the workplace. Tell employees that they are expected to come forward with any inappropriate conduct they witness or become aware of. Include that expectation in your harassment policy, and make sure you have reporting mechanisms to handle reports from bystanders and witnesses.

Another method of involving employees who witness unlawful harassment is to teach bystander intervention techniques. For example, if an employee sees a coworker being inappropriately touched, she may intervene by getting the coworker out of the area and away from the situation. Inventing a meeting the victim must attend or a phone call she needs to take can be a way to defuse the situation. Bystanders need not (and should not) put themselves in harm’s way when they intervene, but the presence of an additional person is often all that’s needed to break up a harmful scenario.

Make harassment training personal and relevant

Many organizations offer their employees harassment training on a regular basis, often annually. But as time passes, the training may become dull, or it may only be offered online, which means employees might multitask during the training or tune it out altogether.

In-person training can go a long way toward getting employees to take workplace harassment seriously. When employees are allowed to interact with the trainer and each other, the concepts often sink in better, and clarifications that may not be possible with online training can be made. Training should involve harassment scenarios that help employees understand the type of conduct that’s unacceptable. It also should cover your policies, reporting mechanisms, and the consequences for violations.

Consider bringing in outside trainers to keep the content fresh. And remember to include leaders in your training to show that they take the issue seriously, helping to reinforce your antiharassment culture.

Make an anonymous hotline available

Consider setting up an 800 number or using a hotline service that allows employees to report potential harassment or workplace misconduct 24/7. The hotline need not be staffed as long as it permits employees to leave a message. Hotlines can be an additional reporting mechanism that feels less threatening or embarrassing to victims.

Why offer so many reporting avenues, including anonymous reporting? Because you can do something about workplace harassment only if you know it’s occurring. Reports of allegedly inappropriate behavior should trigger a prompt and thorough investigation. If you discover that inappropriate conduct occurred, take steps to stop it from happening again, including terminating the person responsible. You cannot have a zero-tolerance policy if you let harassment continue or allow employees to “get away with it.”

Avoiding liability for harassment is worth changing your practices

With sexual harassment settlements topping six and even seven figures, it’s definitely worth your while to update your approach to handling and preventing workplace harassment. Companies that continue to do what they’ve always done, refusing to change in the #MeToo environment, will find themselves in court—or, perhaps worse, in the news. But updating your approach and changing your culture to show employees that your organization won’t tolerate sexual harassment will keep you from having to write those big settlement checks.

Plaintiff and description of defendant	Claims and statutes at issue	Damages, settlement amount, or other relief
EEOC v. hospitality company (District of Colorado, 2016)	Claims: • Sexual harassment (hostile work environment) • Retaliation	Settlement. $1,020,000

EEOC v. packing company (District of Colorado 2015)	Claims: • Sexual harassment (hostile work environment) • Retaliation	Settlement. $450,000
EEOC v. retail meat company (District of Colorado 2015)	Claims: • Sexual harassment (hostile work environment) • Retaliation	Settlement. $370,000 split between 21 women
EEOC v. bakery (District of New Mexico 2013)	Claims: • Sexual harassment (hostile work environment) • Gender discrimination	Settlement. $220,000 split between 19 women
EEOC v. restaurant group (District of New Mexico 2012)	Claims: • Sexual harassment (hostile work environment)	Settlement. $1,000,000
EEOC v. automotive group (District of Colorado 2012)	Claims: • Sexual harassment (hostile work environment) • Retaliation	Settlement. $50,000
EEOC v. pest control company (District of Utah 2011)	Claims: • Sexual harassment (hostile work environment)	Settlement. $160,000 split between class of female employees
EEOC v. corrections company (District of Colorado 2009)	Claims: • Sexual harassment (hostile work environment) • Retaliation	Settlement. $1,300,000 to plaintiff, plus $140,000 in attorney’s fees and costs
EEOC v. auto dealership (District of Colorado 2007)	Claims: • Sexual harassment (hostile work environment) • Retaliation • Gender discrimination	Settlement. $12,500 split between four female employees

October 2, 2018

Wyoming Employer Sued for Paying Female RNs Less Than Male RNs

Brad Cave

by Brad Cave

Paying an experienced female registered nurse (RN) less than a newly licensed male RN has a Wyoming healthcare employer defending a lawsuit brought by the Equal Employment Opportunity Commission (EEOC). On September 28, 2018, the EEOC filed a complaint in the federal court in Wyoming alleging that Interim Healthcare of Wyoming, Inc. (Interim) violated the Equal Pay Act and Title VII by paying employees of one sex lower wages than employees of the opposite sex for substantially equal work.

Pay Inequity Among RNs is Alleged

According to the complaint, female Nicole Aaker was hired by Interim as a Home Care RN in November 2015. Aaker had received her RN license from the Wyoming State Board of Nursing in June 1998 and at the time of her hire, had about 17 years of professional RN experience. Interim paid her $28 per hour.

The complaint alleges that Interim hired male RN Bailey Jessee as a Home Care RN in late May 2015, about six months prior to hiring Aaker. Jessee had just received his RN license from the State Board of Nursing in February 2015 and he had about two months of professional RN experience. Interim paid him $29 per hour.

Further statements in the complaint allege that at least five additional female nurses were paid hourly rates less than the $29 per hour rate paid by Interim to Jessee, including the following:

Female RN with about 2 years of experience was paid $26 per hour
Female RN with about 18 years of experience was paid $28 per hour
Female RN with about 30 years of experience was paid $26 per hour
Female RN with about 26 years of experience was paid $28.50 per hour
Female RN with about one month of experience was paid $26 per hour, and was given a raise to $28 per hour after over a year of employment with Interim.

Employer Allegedly Fails to Respond to Internal Complaints

Interestingly, it was the male RN, Bailey Jessee, who appears to have raised the initial complaints to Interim about the disparity in his pay and Aaker’s pay, according to the complaint. Jessee allegedly raised the pay disparity issue at least twice to Interim Administrator Crystal Burback who responded that the pay difference was due to experience. When Jessee replied that Aaker had a lot more nursing experience than he did, Burback allegedly became angry and told Jessee that he shouldn’t discuss his salary at all.

The complaint further alleges that on another occasion, Jessee told Interim Director of Healthcare Service Lori Norby and Crystal Burback that he would be willing to take a pay cut to make his pay rate equal with Aaker’s hourly rate. Although Norby seemed willing to accept that offer, Burback allegedly became angry and defensive. A few months later, Jessee resigned from Interim.

The allegations in the complaint state that Aaker also complained to Burback about the pay discrepancy between her hourly rate and Jessee’s rate. Burback allegedly first responded that she was paid “per experience,” and then responded that it didn’t matter if Aaker had more experience than Jessee – she was hired at $28 per hour and it would not change. The complaint alleges that after receiving no response to her complaints, Aaker was constructively discharged on April 29, 2016.

Sex Discrimination Claim

Although the Equal Pay Act violation is front and center in the EEOC’s complaint, the allegations include that Aaker and other female nurses were subjected to working conditions involving sex discrimination that were so intolerable that the female nurses felt compelled to resign. In alleging constructive discharge based on sex, the EEOC writes that Burback engaged in inappropriate workplace conduct, including regularly demeaning Aaker, calling Aaker “stupid,” telling Aaker that she was not doing her job, slapping Aaker on the buttocks, and, in the presence of Aaker, grabbing a female social worker’s breast.

EEOC Seeks Damages and an Injunction

The EEOC has made enforcement of equal pay laws one of its six national priorities as specified in its Strategic Enforcement Plan. In the Interim lawsuit, the EEOC seeks a permanent injunction to stop Interim from engaging in compensation discrimination based on sex. The agency further seeks back pay damages for the female nurses for lost wages, liquidated damages, damages to compensate for pain and suffering, and punitive damages.

Audit Your Pay Practices for Disparities

Due to the EEOC’s focus on compensation practices that discriminate based on gender, employers are well advised to audit their own pay practices to determine whether they are paying employees in substantially similar jobs differently along gender lines. If so, take proactive steps now to correct any equal pay issues so that you do not become the EEOC’s next target.

April 2, 2018

Service Advisors Exempt From Overtime, Says Supreme Court

Brian Mumaugh

by Brian Mumaugh

In a 5-to-4 decision, the Supreme Court ruled that service advisors at car dealerships are exempt from overtime pay under the Fair Labor Standards Act (FLSA). In an opinion written by Justice Thomas, and joined by Justices Roberts, Kennedy, Alito and Gorsuch, the Court determined that service advisors are salesmen who are primarily engaged in servicing automobiles, putting them within the FLSA exemption language. Encino Motorcars, LLC v. Navarro.

Service Advisors Challenged Exempt Status

In 1961, Congress amended the FLSA to exempt all employees at car dealerships from overtime pay. A few years later in 1966, however, Congress narrowed the car dealership exemption so that it no longer exempted all dealership employees but instead applies only to “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles, truck, or farm implements, if he is employed by a nonmanufacturing establishment primarily engaged in the business of selling such vehicles or implements to ultimate purchasers” (as currently written). Until 2011, federal courts and the Department of Labor (DOL) interpreted that exemption to apply to service advisors.

In 2011, however, the DOL issued a new rule stating that a service advisor was not a “salesman” under the FLSA exemption. This new interpretation ran contrary to 50-years of precedent and threw auto dealerships a curve ball. In 2012, service advisors at a Mercedes-Benz dealership in Los Angeles sued their employer, alleging that their regular work hours were 7 a.m. to 6 p.m. resulting in a minimum of 55 hours per week for which they were owed overtime pay for all hours over 40 in a work week.

The Mercedes-Benz dealership moved to dismiss the complaint, arguing that service advisors were exempt under the FLSA language, despite the new DOL interpretation. The district court agreed and dismissed the lawsuit. The service advisors appealed and the Ninth Circuit Court of Appeals reversed, relying on the DOL’s 2011 rule. The dealership appealed to the Supreme Court who decided that the DOL’s rule could not be given deference as it was procedurally defective. On remand, the Ninth Circuit again ruled in favor of the service advisors, determining that Congress did not intend to exempt service advisors from overtime, in part because FLSA exemptions should be narrowly construed and the legislative history did not specifically mention service advisors. The case went up to the Supreme Court a second time.

Service Advisors Are Salesmen Engaged in Servicing Automobiles

The Supreme Court looked to the plain meaning of “salesman” as someone who sells goods and services. Because service advisors sell customers services for their vehicles, the Court stated that a service advisor “is obviously a ‘salesman.’”

The Court also decided that service advisors are primarily engaged in servicing automobiles because they are “integral to the servicing process.” The Court acknowledged that service advisors do not physically repair cars, but the justices decided that the phrase “primarily engaged in servicing automobiles” necessarily included individuals who do not physically repair automobiles, including service advisors.

In an interesting passage of the opinion, the Court rejected the Ninth Circuit’s statement that FLSA exemptions should be narrowly construed. Justice Thomas quoted his friend and former colleague, deceased Justice Antonin Scalia, “Because the FLSA gives no ‘textual indication’ that its exemptions should be construed narrowly, ‘there is no reason to give [them] anything other than a fair (rather than a ‘narrow’) interpretation.’” A fair reading of the FLSA, the majority concluded, focuses not only on the overall objective of the law but also on the stated exemptions. And the Court concluded that a fair reading of the automobile salesmen, partsmen, and servicemen exemption is that it covers service advisors.

Dissent Says Overtime Required, Unless Commission Exemption Applies

Justice Ginsburg wrote a dissent with which Justices Breyer, Sotomayor, and Kagan joined, stating that because service advisors neither sell nor repair automobiles, they should not be covered by the auto dealership salesman, partsman, and serviceman exemption. The dissent notes that many positions at dealerships are not covered by the exemption, including painters, upholsterers, bookkeepers, cashiers, purchasing agents, janitors, and shipping and receiving clerks. Consequently, the dissent stated that there are no grounds to add service advisors as a fourth category of dealership workers that are exempt, adding to the three positions explicitly enumerated in the FLSA exemption.

The dissent notes that many dealerships, including the Mercedes-Benz dealership in this case, compensate their service advisors on a primarily sales commission basis. According to the dissent, such commission-based positions could fall within the FLSA overtime exemption that applies to retail and service establishments where employees who receive more than half of their pay through commission are exempt from overtime pay, so long as each employee’s regular rate of pay is more than one-and-one-half times the minimum wage. The dissent concludes that even without the auto salesman, partsman, serviceman exemption at issue, many service advisors compensated on a commission basis would remain ineligible for overtime premium pay under the commission exemption.

Dealerships May Treat Service Advisors As Exempt

As a result of the Court’s ruling, car dealerships may continue to treat their service advisors as exempt from overtime under the FLSA. Dealerships should still review applicable state laws to ensure that the exemption applies under state wage law. It is also a good time to review written job descriptions to include service advisor duties that support their exempt status under this decision.

March 20, 2018

Settlements Reached in Joint-Employer Case That Could Have Affected Franchisors Nationwide

Steven Gutierrez

By Steve Gutierrez

Franchisor McDonald’s USA LLC has agreed to settle the high-profile labor disputes over whether it is a joint employer with its franchisees. Although the settlement still needs to be approved by the administrative law judge overseeing the litigation, McDonald’s and its franchisees negotiated settlement agreements with the National Labor Relations Board (NLRB) to settle allegations of unfair labor practice charges without admitting liability or wrongdoing. In doing so, McDonald’s avoids prolonged litigation and a potentially adverse decision that would have had sweeping ramifications for franchisors and their franchisees nationwide.

Protracted Litigation Over Joint-Employer Status

In 2012, multiple McDonald’s employees filed unfair labor practice charges against their employer, seeking to improve their working conditions. In 2014, former NLRB General Counsel, Richard Griffin, approved filing dozens of unfair labor practice complaints against the larger franchisor, McDonald’s USA, under a theory that McDonald’s USA is a joint employer of the employees of McDonald’s franchises. By pursing the franchisor, the 2014 NLRB signaled that it was attempting to hold the larger, nationwide entity responsible for treatment of its franchisees’ employees.

McDonald’s USA, along with many restaurant, industry, and employer groups, vigorously objected, arguing that a franchisor is not a joint employer with its franchisees and therefore, cannot be held liable for any labor law violations made by a franchisee. The joint-employer test at the time was based on whether the putative employer exercises direct control over the employees and McDonald’s USA argued that it did not exercise such control over its franchisees’ employees.

In 2015, the NLRB issued its controversial decision in Browning-Ferris Industries that significantly broadened the joint-employer test so that an entity could be deemed a joint employer if it reserved contractual authority over some essential terms and conditions of employment, allowing it to have indirect control over the employees. (See our post here.) Under that expanded test, McDonald’s USA faced higher scrutiny from the NLRB as to whether it was a joint employer and whether it retained some indirect control over the employees of its franchisees.

Due to changes in the makeup of the NLRB under the Trump Administration, as well as a new NLRB General Counsel, the NLRB has sought to reverse Browning-Ferris Industries and return to the former joint-employer test that required direct and immediate control. In December 2017, the NLRB overturned Browning-Ferris in its Hy-Brand decision, only to have to vacate Hy-Brand in February 2018 because new Board member William Emanuel should not have participated in that decision. As a result, the 2015 Browning-Ferris joint-employer test is still the standard used to determine joint-employer status under the National Labor Relations Act.

Leaving The Status Quo on Joint-Employer Status – For Now

By settling these cases, both McDonald’s USA and the current NLRB avoid having to litigate and have a judge rule on whether franchisors like McDonald’s can be deemed a joint employer under the current Browning-Ferris test. Although the Board (and Congress) continue to seek to overturn Browning-Ferris, the McDonald’s settlement will push the issue down the road to another day.

According to the NLRB’s March 20, 2018 announcement, the settlement will provide a full remedy for the employees who filed charges against McDonald’s, including 100% of backpay for the alleged discriminatees. The settlement also will avoid years of potential additional litigation.

Take Aways

Franchisors, staffing companies, and other entities who have some contractual authority or obligations related to employees of a second entity need to use caution to ensure that the second entity complies with all applicable labor laws. With the broad Browning-Ferris test in place, entities with reserved contractual control or indirect control of another entity’s employees may be found to be a joint employer under the NLRA. This could open the door to liability for labor law violations as well as union organization and collective bargaining obligations related to joint employees. If in doubt about your exposure, consult with an experienced labor attorney.

Photo credit: AP2013/Jon Elswick

January 8, 2018

Confidential Sexual Harassment Settlements No Longer Tax Deductible

Steven Gutierrez

By Steve Gutierrez

The recently enacted tax reform bill contains a short provision that could significantly affect whether and how employers settle sexual harassment claims. Section 13307 of the Tax Cuts and Jobs Act states that no deduction is allowed for any settlement or payment related to sexual harassment or sexual abuse if the settlement or payment is subject to a nondisclosure agreement. The new provision also prohibits a tax deduction for attorney’s fees related to confidential sexual harassment settlements or payments.

Deductibility Hinges On Confidentiality of Settlement

The new tax provision eliminates a tax deduction for sexual harassment-related settlements only if the settlement or payment is subject to a nondisclosure agreement. In other words, if an employer requires the alleged victim of sexual harassment or abuse to keep the settlement (and presumably the underlying claim) confidential, then the amount of the payment and any attendant attorney’s fees are not tax deductible. Sexual harassment/abuse settlements and related attorney’s fees remain tax deductible if they are not subject to a nondisclosure agreement.

The policy behind this provision appears to be in response to the recent spate of sexual harassment and abuse claims coming to light. The “#MeToo” campaign has raised significant concerns about companies and their high-level employees hiding behind nondisclosure agreements to avoid public scrutiny about unlawful sexual conduct in the workplace. Repeat offenders often keep their jobs when their employers pay off the victims in secret. By eliminating the tax deduction for confidential settlements and related attorney’s fees, companies will be forced to weigh confidentiality against tax deductibility when deciding whether to settle each claim.

What If Sexual Harassment/Abuse Is Only One of Multiple Claims Being Settled?

One of the questions left unanswered in this new tax reform provision is what happens to the tax deduction for payments that settle more than one kind of employment claim. In many cases, the victim of sexual harassment or sexual abuse brings other claims against his or her employer, such as retaliation, gender discrimination, violation of the Equal Pay Act, or defamation. The language of the provision is unclear as to what is meant by any settlement or payment related to sexual harassment or sexual abuse. One could argue that a retaliation claim that arose from an adverse action following a complaint of sexual misconduct would be related to the sexual harassment claim. But what about an Equal Pay Act claim? Is that related to sexual harassment or sexual abuse?

It is unclear whether confidential settlement payments related to these other types of employment claims will remain tax deductible when lumped in with a sexual harassment settlement. This open question will likely lead employers to separate settlement agreements and payments for non-sexual harassment claims in order to keep the settlement of these other types of claims confidential and tax deductible. It also could lead employers (on likely advice from their attorneys) to structure settlements of multiple claims with an allocation of only a small amount, say $100, to the settlement of the sexual harassment claim, with the remainder of any settlement payment attributed to other types of claims alleged by the victim. Absent any clarification on this issue, we expect this will be the subject of much litigation down the road. In the meantime, companies and their attorneys likely will use creative drafting of settlements to try to separate unrelated claims in order to keep the settlement of non-sexual-harassment claims confidential and retain the deductibility of payments and attorney’s fees incurred for non-harassment matters.

Deductibility of Victim’s Attorney’s Fees

Another open question is whether the denial of deductibility applies only to the companies making settlement payments and their own attorney’s fees related to such settlements, or if it applies to the attorney’s fees incurred by the victim as well. The new provision denying deductibility for settlements subject to nondisclosure agreements amends section 162 of the Internal Revenue Code (IRC) which is the section that allows deductions for ordinary and necessary trade or business expenses paid or incurred during the course of a taxable year. Generally, an individual would not be able to take a business deduction under IRC Section 162. However, the language in the new provision does not make it clear that it applies only to the business’s own attorney’s fees, thus leaving open an interpretation that it also prohibits the victim of sexual harassment or sexual abuse from deducting his or her attorney’s fees related to settlements of such claims. It also could be interpreted to deny the deduction to a business that pays the victim’s attorney’s fees as part of a confidential settlement.

This could hit victims hard as those who sign nondisclosure agreements may have to pay taxes on the entire settlement, including any amounts paid to cover his or her attorney’s fees. Or, it could lead victims to reject any settlement containing a nondisclosure provision in order to avoid paying taxes on the attorney’s fee portion of the settlement payment. It also may make employers less likely to agree to pay the victim’s attorney’s fees as part of a confidential settlement because the total amount of fees paid to attorneys on both sides would not be deductible as a business expense. It is unclear whether Congress meant to hamstring victims in this way, or if it was the result of inarticulate drafting. We will have to see whether a correction or guidance is issued to clarify how the new denial of deductibility provision affects a victim’s ability to deduct attorney’s fees.

Get Advice Before Settling

The denial of deductibility provision affects any amounts paid or incurred after December 22, 2017 (when the tax reform act became effective). This makes one thing about this new tax deduction provision clear – employers should get advice from competent counsel and tax professionals before settling any sexual harassment or sexual abuse claims. Employers will need to evaluate each case individually to decide whether confidentiality trumps deductibility. Then, after the employer decides whether to impose a nondisclosure requirement on the alleged victim of sexual harassment/abuse, the settlement agreement must be drafted carefully in light of this new provision. If the victim asserts multiple claims, employers may be able to keep the settlement of non-harassment claims both confidential and deductible, if the settlement agreement is drafted correctly.

The bottom line is seek advice early and don’t use boilerplate settlement agreements without considering the tax deductibility consequences of nondisclosure provisions.