New Tax Bill Deletes Deduction for Sexual Harassment Settlements
Why it matters
Employers, take note: The new Tax Cuts and Jobs Act contains a provision that prohibits deductions for settlements or payments related to sexual harassment or abuse if the payment is subject to a nondisclosure agreement. Effective after Dec. 22, 2017, the provision may have broad application for employers, as neither the statute nor the accompanying legislative history featured definitions of the terms, and as employment lawsuits often include a claim for sexual harassment among other allegations. This change could complicate settlement negotiations, with the need to break out payment for claims “related to sexual harassment or sexual abuse” in order to maintain a deduction for a portion of a payment for other claims in the action, and also has implications for attorney’s fees.
Detailed discussion
President Donald J. Trump signed the Tax Cuts and Jobs Act into law on Dec. 22, 2017. One provision that was included in the mammoth statute received little fanfare and was buried in between sections titled “Information with Respect to Certain Fines, Penalties, and Other Amounts” and “Repeal of Deduction for Local Lobbying Expenses.”
Section 13307 of the measure, the new Section 162(q)(2) of the Tax Code, states: “No deduction shall be allowed under this chapter for (1) any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement, or (2) attorney’s fees related to such a settlement or payment.”
For employers, the new provision presents a choice between a nondisclosure agreement and a tax deduction for a settlement related to “sexual harassment or sexual abuse.” One wrinkle: Legislators failed to include a definition or elaboration of the term “related to sexual harassment or sexual abuse,” which leaves unanswered questions about the application of the provision.
It could be read as applying to any action that includes a claim of sexual harassment, or an employer could argue it is limited to a claim with a central focus of sexual harassment. To avoid this problem, employers seeking to maintain confidentiality of at least some terms of a settlement agreement may want to consider separating out payment for various claims, if the facts permit. This could allow an employer to maintain deductibility for at least some of the claims at issue.
The new provision also has implications for employees, as the denial’s inclusion of attorney’s fees is not limited to those costs incurred by defendants. Historically, a plaintiff could claim the expense of attorney’s fees as an itemized deduction, but the new code appears to foreclose that option.
Sen. Robert Menendez (D-N.J.) proposed the provision. “I think most Americans would be outraged to know that they are subsidizing sexual predators in the tax code,” he told The New York Times.
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NLRB Reverses Course in Two Major Decisions
Why it matters
The National Labor Relations Board (NLRB or Board) ended 2017 with a bang, reversing two prior standards with a pair of employer-friendly decisions. First, the Board overruled the Lutheran Heritage Village-Livonia standard with regard to facially neutral workplace rules, policies and employee handbook provisions. Disavowing the “reasonably construe” standard, the NLRB adopted a new test to consider two things when evaluating a facially neutral provision: the nature and extent of the potential impact on National Labor Relations Act (NLRA) rights, and legitimate employer justifications associated with the rule. That 3-to-2 decision was followed by another split ruling overturning Browning-Ferris Industries on the scope of joint employer liability. Going forward, two or more entities will be deemed joint employers under the NLRA if there is proof that one entity has actually exercised control over essential employment terms of another entity’s employees and has done so directly and immediately in a manner that is not limited and routine.
Detailed discussion
In the first major ruling, the National Labor Relations Board (NLRB or Board) considered The Boeing Co.’s policy restricting the use of camera-enabled devices (such as cellphones) on its property. As a designer and manufacturer of military and commercial aircraft, Boeing performs work that is highly sensitive and sometimes even classified. To protect security, the company has a “no-camera” rule.
As the rule was facially neutral and not adopted to explicitly restrict activity protected by Section 7 of the National Labor Relations Act (NLRA), an administrative law judge (ALJ) applied the test set forth in Lutheran Heritage Village-Livonia. Reasoning that employees would “reasonably construe” the rule to prohibit Section 7 activity, the ALJ struck it down.
Boeing appealed to the NLRB, which reversed, tossing out the Lutheran Heritage standard and adopting a new rule.
“The judge’s decision in this case exposes fundamental problems with the Board’s application of Lutheran Heritage when evaluating the maintenance of work rules, policies and employee handbook provisions,” the NLRB majority wrote. “[W]e have decided to overrule the Lutheran Heritage ‘reasonably construe’ standard. The Board will no longer find unlawful the mere maintenance of facially neutral employment policies, work rules and handbook provisions based on a single inquiry, which made legality turn on whether an employee ‘would reasonably construe’ a rule to prohibit some type of potential Section 7 activity that might (or might not) occur in the future.”
Multiple defects were inherent in the Lutheran Heritage standard, the Board said, beginning with a “single-minded consideration” of NLRA-protected rights without taking into account any legitimate employer justifications associated with policies, rules and handbook provisions. The test also improperly limited the Board’s own discretion and “has defied all reasonable efforts to make it yield predictable results,” the Board added.
As a result, over the past 13 years, the NLRB has invalidated “a large number of common-sense rules and requirements that most people would reasonably expect every employer to maintain,” the Board said. “We do not believe that when Congress adopted the NLRA in 1935, it envisioned that an employer would violate federal law whenever employees were advised to ‘work harmoniously’ or conduct themselves in a ‘positive and professional manner.’”
The NLRB established a new standard in place of Lutheran Heritage for evaluating a facially neutral policy, rule or handbook provision, which requires evaluation of two things: “(i) the nature and extent of the potential impact on NLRA rights, and (ii) legitimate justifications associated with the rule. We emphasize that the Board will conduct this evaluation, consistent with the Board’s ‘duty to strike the proper balance between … asserted business justifications and the invasion of employee rights in light of the Act and its policy.”
As a result of this balancing, the Board delineated three categories of employment policies, rules and handbook provisions. Category 1 includes rules that the Board designates as lawful to maintain “either because (i) the rule, when reasonably interpreted, does not prohibit or interfere with the exercise of NLRA rights; or (ii) the potential adverse impact on protected rights is outweighed by justifications associated with the rule.”
Boeing’s no-camera rule fits into this category, the NLRB said, as do other rules requiring employees to abide by basic standards of civility.
In Category 2, the Board fit rules “that warrant individualized scrutiny in each case as to whether the rule would prohibit or interfere with NLRA rights, and if so, whether any adverse impact on NLRA-protected conduct is outweighed by legitimate justifications.”
Finally, Category 3 will feature rules that the Board will designate as unlawful to maintain “because they would prohibit or limit NLRA-protected conduct, and the adverse impact on NLRA rights is not outweighed by justifications associated with the rule.” An example would be a rule that prohibits employees from discussing wages or benefits with one another.
These categories are not part of the test itself, the NLRB noted, but represent a classification of results from the Board’s application of the new test.
Applying the new standard to Boeing’s no-camera rule, the Board reversed the ALJ’s decision and found that maintenance of the rule did not constitute unlawful interference with protected rights in violation of Section 8(a)(1) of the NLRA.
The dissenting members of the Board offered a stinging rebuke to the majority, arguing that the new test is “overly protective of employer interests and under protective of employee rights,” operating as “a how-to manual for employers intent on stifling protected concerted activity before it begins.”
But the NLRB was only beginning its changes, issuing a second decision that flipped the switch on the legal standard for joint employers.
In 2015, the Board adopted a standard in Browning-Ferris Industries of California, Inc., that even when two entities have never exercised joint control over essential terms and conditions of employment, and even when any joint control is not “direct and immediate,” the two entities will still be joint employers based on the existence of “reserved” joint control, or based on indirect control or control that is “limited and routine.”
An ALJ applied that standard in a case involving Hy-Brand Industrial Contractors and Brandt Construction Co. and found the two entities were joint employers for purposes of the NLRA when they terminated a total of seven workers. When the employers appealed to the Board, the NLRB took the opportunity to establish a new test.
“We find that the Browning-Ferris standard is a distortion of common law as interpreted by the Board and the courts, it is contrary to the Act, it is ill-advised as a matter of policy, and its application would prevent the Board from discharging one of its primary responsibilities under the Act, which is to foster stability in labor-management relations,” the Board majority wrote. “Accordingly, we overrule Browning-Ferris and return to the principles governing joint-employer status that existed prior to that decision.”
The NLRB said that Browning-Ferris rewrote the decades-old test for determining who is the employer, a change that “subjected countless entities to unprecedented new joint bargaining obligations that most may not even know they have, to potential joint liability for unfair labor practices and breaches of collective-bargaining agreements, and to economic protest activity, including what have heretofore been unlawful secondary strikes, boycotts, and picketing.”
The Board found five major problems with Browning-Ferris: (i) It exceeded the NLRB’s statutory authority; (ii) it based its rationale on an incorrect position that present conditions are unique to our modern economy; (iii) it effectively permitted the Board to rewrite the principles of agency; (iv) it abandoned a long-standing test that provided certainty and predictability, and replaced it with a vague and ill-defined standard; and (v) it applied the wrong remedy to a perceived inequality of bargaining leverage in collective bargaining relationships.
In overruling Browning-Ferris, the NLRB reinstated the prior joint employer standard for pending cases and with retroactive application.
“Thus, a finding of joint-employer status requires proof that the alleged joint-employer entities have actually exercised joint control essential employment terms (rather than merely having ‘reserved’ the right to exercise control), the control must be ‘direct and immediate’ (rather than indirect), and joint-employer status will not result from control that is ‘limited and routine,’” the Board said.
Applying the new test to the parties in the case, the Board found Brandt and Hy-Brand were still joint employers. “Substantial evidence supports a finding that the two entities exercised joint control over essential employment terms involving Brandt and Hy-Brand employees, the control was direct and immediate, and it was not limited and routine,” the NLRB wrote.
Again, two members of the Board dissented from the decision. The case was not a proper vehicle for reconsidering the joint employer standard, the dissenters said, and “the resurrected standard not only is impossible to reconcile with the common law of agency, [but] it also violates the explicit policy of the [NLRA]: to ‘encourag[e] the practice and procedure of collective bargaining.’ Today’s decision is an unfortunate and unwarranted step backward.”
To read the decision and order in The Boeing Company, click here.
To read the decision and order in Hy-Brand Industrial Contractors, Ltd., click here.
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Legislators Propose Ban on Arbitration in Sex Harassment Disputes
Why it matters
A new bill introduced in Congress would prohibit arbitration agreements in situations involving sexual harassment. The Ending Forced Arbitration of Sexual Harassment Act of 2017, sponsored by Sens. Kirsten Gillibrand (D-N.Y.) and Lindsey Graham (R-S.C.), states that “no predispute arbitration agreement shall be valid or enforceable if it requires arbitration of a sex discrimination dispute,” defined as “a dispute between an employer and employee arising out of conduct that would form the basis of a claim based on sex under Title VII.” Senate Bill 2203 would not apply to employers that are excluded from coverage by Title VII or by any arbitration provision in a collection bargaining agreement. The measure would allow victims of sexual harassment or discrimination to “seek justice, discuss their cases publicly, and eliminate institutional protection for harassers,” the legislators said in a statement.
Detailed discussion
In the wake of the tidal wave of allegations by women of sexual harassment around the country, from Hollywood to Washington, D.C., federal lawmakers have introduced a new measure that would prohibit forced arbitration agreements that require the arbitration of sexual harassment and discrimination claims.
Pursuant to the Ending Forced Arbitration of Sexual Harassment Act of 2017, “no predispute arbitration agreement shall be valid or enforceable if it requires arbitration of a sex discrimination dispute.”
“Predispute arbitration agreement” was defined to mean “any agreement to arbitrate a dispute that had not yet arisen at the time of the making of the agreement,” while the term “sex discrimination dispute” refers to “a dispute between an employer and employee arising out of conduct that would form the basis of a claim based on sex under Title VII of the Civil Rights Act of 1964.”
The measure would apply neither to employers who are excluded from coverage by Title VII nor “to any arbitration provision in a contract between an employer and a labor organization or between labor organizations, except that no such arbitration provision shall have the effect of waiving the right of an employee to seek judicial enforcement of a right arising under a provision of the Constitution of the United States, a State constitution, or a Federal or State statute, or public policy arising therefrom.”
Senate Bill 2203 was introduced by Sens. Kirsten Gillibrand (D-N.Y.) and Lindsey Graham (R-S.C.), who noted that an estimated 60 million Americans are subject to forced arbitration clauses in their employment contracts.
“When a company has a forced arbitration policy, it means that if a worker is sexually harassed or sexually assaulted in the workplace, they are not allowed to go to court over it; instead, they have to go into a secret meeting with their employer and try to work out some kind of deal that really only protects the predator,” Sen. Gillibrand said in a statement about the measure. “They are forbidden from talking about what happened, and then they are expected to keep doing their job as if nothing happened to them. No worker should have to put up with such an unfair system.”
Sen. Graham added that he does not oppose arbitration but that “to expect change without pushing for change is unrealistic. Ensuring that sexual harassment and assault claims cannot be negotiated away before they occur will create incentives to change the workplace environment, making it less hostile and more respectful.”
After being introduced in the Senate, the bill was referred to the Committee on Health, Education, Labor, and Pensions.
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Supreme Court Passes on PAGA Arbitration Challenge
Why it matters
The Supreme Court’s decision to pass on a California appellate opinion keeps in place the state court’s holding that a predispute waiver by a private employee cannot compel arbitration in a Private Attorneys General Act (PAGA) case which is brought on behalf of the state. The case began when Roberto Betancourt filed suit alleging he and other employees of Prudential Overall Supply worked more than eight hours per day or more than 40 hours per week but were not compensated for overtime or for missed breaks and meal periods. Pursuant to an employment handbook, Prudential moved to compel arbitration of the action. A trial court denied the motion and an appellate panel affirmed, ruling that Betancourt’s single PAGA claim was brought on behalf of the state, which was not a party to the arbitration agreement. Prudential filed a writ of certiorari with the Supreme Court, but the justices denied the petition, leaving the California appellate panel’s opinion in place and employers facing conflicting authority. The U.S. Court of Appeals, Ninth Circuit recently permitted arbitration of PAGA claims, holding that an individual employee contract can bind government parties.
Detailed discussion
Roberto Betancourt filed a single count under the Private Attorneys General Act (PAGA) against his employer, Prudential Overall Supply, alleging that he and his fellow employees worked overtime but were not compensated for all their hours worked or for missed breaks and meal periods.
Prudential responded with a motion to compel arbitration pursuant to an agreement signed by Betancourt in 2006 that also waived “any right to bring claims on a representative or class member basis.” A trial court denied the motion, relying on Iskanian v. CLS Transportation, where the California Supreme Court held that “an arbitration agreement requiring an employee as a condition of employment to give up the right to bring representative PAGA actions in any forum is contrary to public policy.”
The employer appealed, arguing that Betancourt’s PAGA claim was not exempt from arbitration because it was not really a PAGA action and was in substance a standard wage-and-hour case.
Affirming the trial court, the appellate panel disagreed. If Prudential wanted to argue that Betancourt’s complaint sets forth non-PAGA causes of action, the defendant missed a procedural step, the court said. Instead of a motion to compel arbitration, the employer should have challenged the pleadings and, if there are private, non-PAGA claims, seek arbitration on those matters.
Otherwise, Iskanian foreclosed Prudential’s motion to compel arbitration because “a defendant cannot rely on a predispute waiver by a private employee to compel arbitration in a PAGA case, which is brought on behalf of the state,” the court said. “This is currently a PAGA case, and Prudential is relying on a 2006 predispute arbitration agreement by Betancourt to compel arbitration in this 2015 case brought on behalf of the state. The state is not bound by Betancourt’s predispute agreement to arbitrate.”
The fact that Betancourt agreed to arbitrate his private employment disputes with Prudential is not relevant, the California appellate panel wrote. “Betancourt’s lawsuit is a PAGA claim, on behalf of the state,” the court said. “The state is not bound by Betancourt’s predispute arbitration agreement. As a result, we find Prudential’s reliance on Betancourt’s arbitration agreement to be unpersuasive.”
Prudential appealed, filing a writ of certiorari with the Supreme Court. But the justices denied the petition without comment, leaving in place the appellate court’s decision.
To read the California appellate panel’s opinion in Betancourt v. Prudential Overall Supply, click here.
To read the Supreme Court’s order list denying cert, click here.
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