President Trump last month signed into law the Tax Cuts and Jobs Act, which includes many changes for employers. Among them are a tax credit for providing paid family and medical leave and the elimination of a business expense deduction related to nondisclosure agreements in sexual harassment settlements.
These particular provisions use a carrot rather than a stick to induce changes in the way employers approach issues that, broadly speaking, will impact women in the workplace.
Paid Family Leave
Currently, the federal Family and Medical Leave Act, or FMLA, requires certain employers to provide eligible employees with up to 12 weeks of leave per year for specified family and medical reasons. These include the care of a new child or seriously ill family member, to recover from their own serious health condition, or to deal with certain obligations (including childcare and related activities) arising from a spouse, parent or child being on, or called to, active duty in the military. However, the Family and Medical Leave Act does not require this leave to be paid.
The Tax Cuts and Jobs Act seeks to encourage employers to provide paid leave by providing them with a tax credit for paying wages to qualifying employees during family and medical leave. This is the first attempt to introduce paid leave at a national level.
According to abetterbalance.org [1], the US is one of only three countries that do not guarantee paid maternity leave. Several states, including New York, California, New Jersey and Rhode Island, have enacted programs to provide partial pay to workers taking time off to bond with a new child or care for a seriously ill relative. Washington DC and Washington state have also passed paid family and medical leave laws, which are due to come into effect in 2020. Other states are also preparing to pass their own paid family and medical leave plans.
The new tax law allows qualifying employers to claim a credit of 12.5% of the amount of family and medical leave wages paid to a qualifying employee if the compensation to the employee while on family and medical leave is 50% of the employee’s normal wages. The credit increases by 0.25% for each percentage point by which the rate of compensation exceeds 50% of the employee’s normal wages, up to a maximum credit of 25%. The maximum amount of family and medical leave that may be taken into account for the credit is 12 weeks. In order to be eligible for the credit, employers will need to have written policies that meet various requirements set forth in the Act.
The credit is only provided for two years and is set to expire Dec. 31, 2019, but may be extended by legislators prior to expiration.
It is not yet clear how the incentive will work in those states where paid leave is mandated, but affected employers should seek legal and/or tax advice on the change.
Non-Disclosure of Sexual Harassment
When settling employment claims, businesses often make payment conditional on the individual’s execution of a non-disclosure agreement, or NDA.
NDAs are widely used to facilitate business negotiations and are standard in employment disputes, particularly where the employer prefers to settle out of court. They are legally binding, but they may be hard to enforce if the information comes into the public domain other than via the employee. Further, they cannot be enforced if the purpose of the NDA is to cover up a criminal act, as an employee cannot be prevented from making a disclosure to a law enforcement agency.
In recent months, with the revelations of sexual abuse and harassment claims across industries and continents, it has also emerged that some victims of abuse have been required to sign NDAs.
The Tax Cuts and Jobs Act seeks to discourage use of NDAs in sexual harassment settlements by prohibiting the tax deduction of any settlement or payment related to sexual harassment or sexual abuse, if such settlement or payment is subject to a non-disclosure agreement, and attorney’s fees related to such a settlement or payment.
This may cause some difficulty for employers making a settlement based on several claims, including sexual harassment. As before, if in doubt, consult a lawyer.