How the Tax Cuts and Jobs Act impacts paid leave

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Several provisions in the Tax Cuts and Jobs Act will directly impact the workplace, including one that gives some employers a credit for providing paid family and medical leave if they meet specific requirements and another that eliminates certain tax deductions in sexual harassment and sexual abuse cases.

The new law creates a credit for employers who provide paid family and medical leave for eligible employees. It allows for a minimum credit of 12.5% of wages paid to qualified employees if the employer meets the minimum payment requirement, with potential increases to the credit for each percentage point above the minimum that employers pay to their employees who have taken leave.

Employers may take into account up to 12 weeks of family or medical leave for any employee in any taxable year. There is, however, a cap on the aggregate amount of this credit.

To take advantage of the credit, employers must meet various requirements, which include having a leave policy in place that provides for qualifying full-time employees to take two weeks or more of annual paid family and medical leave, allowing qualifying part-time employees to take a commensurate amount of leave on a pro rata basis, and meeting the minimum leave payment requirements.

Now is a good time for employers to ensure they have the proper policies in place to benefit from this new credit, which will apply to leave taken in 2018 and 2019.

NDA, sexual harassment deductions gone

Under the Act, no deduction is allowed for:

  • Any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement, or
  • Attorney’s fees related to such a settlement or payment.

While the original intent of this bill may have been to keep corporations from deducting settlements of sexual harassment and sexual abuse allegations from their taxes, the provision has far greater implications.
The bill is not limited to businesses. It extends to individuals who receive settlement payments, nixing the ability to deduct counsel fees. This results in double taxation and is undoubtedly the result of the rush to enact the law before Congress took its Christmas break.

This will undoubtedly make it more difficult to settle sexual harassment and sexual abuse claims. Whereas, prior to the tax law change, claimants would pay taxes on the settlement amount they actually received and their attorneys would be responsible for paying taxes on the attorneys’ fees, a claimant will now be responsible for paying taxes on both, creating another hurdle to settlement.

Sen. Robert Menendez, who introduced the amendment with the intent of curbing write-offs for employers, has recently announced that he intends to introduce legislation to fix the provision.

In the meantime, without a fix, employers and individuals faced with sexual harassment and sexual abuse claims should be cognizant of the need to structure settlements to address this issue.

Legal disclaimer

Copyright 2018. Fox Rothschild LLP. All rights reserved. Reprinted with permission. This publication is intended for general information purposes only. It does not constitute legal advice. The reader should consult with knowledgeable legal counsel to determine how applicable laws apply to specific facts and situations. This publication is based on the most current information at the time it was written. Since it is possible that the laws or other circumstances may have changed since publication, please call an attorney to discuss any action you may be considering as a result of reading this publication.

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