January 18, 2019

By Gordon E. Bosserman
Ninety-nine percent of all civil cases, including those involving claims of sexual harassment, settle. As a result, settlement agreements releasing an employer from liability or requiring the employee to keep the settlement confidential have historically been very important. Commencing January 1, 2019, there will be a dramatic change in the laws that control settlement agreements in cases involving sexual harassment.[1]

1. Civil Code section 1670.11 makes any provision in a contract or settlement agreement “void and unenforceable” if it attempts to prevent a person from testifying in a criminal or administrative proceeding involving a claim of sexual harassment.

2. Code of Civil Procedure section 1001 prohibits any provision that would prevent the disclosure of facts about sexual harassment, sexual discrimination or retaliation over
reporting such acts. The law also prohibits a stipulation for a court order not to reveal such facts. However, if it is the claimant who requests, and the government is not a party, the claimant’s identity can be shielded.[2]

3. Section 13307 of the federal Tax Cuts and Jobs Act of 2017 now provides that no tax deduction is allowed for any settlement related to sexual harassment or sexual abuse claims if the settlement includes a non-disclosure (confidentiality) provision. And, attorneys’ fees (after December 22, 2017) related to such settlement agreements or payments are not tax deductible. This prohibition only applies to sexual harassment types of discrimination. So, discrimination based on age or race would not subject to the same tax or deductibility rules. What this means is that settlement agreements in cases alleging sexual harassment have to be carefully worded to avoid running afoul of these provisions. Don’t just include “boilerplate” confidentiality provisions.

In the future, employers will have to decide how important it is try to achieve confidentiality over such claims. Should the employer dispose of the costs associated with such a claim and run the risk the employee may share the settlement with other employees? Or should the employer run the risk of having a provision be deemed unenforceable and lose the right to deduct the payment and the attorneys’ fees incurred? Of course, there are many other issues such as what are the “facts” involved with the claim, or is it just the fact of the settlement that the employer wants kept confidential. These are issues that are also going to plague employment lawyers for plaintiffs and defendants alike as well as mediators.

[1] Unless otherwise noted, these laws go into effect on January 1, 2019.
[2] Code of Civil Procedure section 340.16 also increases the statute of limitation for sexual harassment claims to 10 years from 3 years.