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The Pros and Cons of Confidentiality Provisions in Settling Sexual Harassment Claims

It has always been understood that for an employee to get money in a settlement of claims with an employer, that employee must sign a release agreement. What has been less understood is that almost every release agreement contains a confidentiality provision.

Confidentiality provisions are insisted upon by employers in order to protect the employer's reputation and to keep the settlement amount secret. After all, a settlement usually comes at a time when the claims are only allegations and a settlement, especially of a substantial size, may indicate that the employer has something to hide.

In reality, there are a number of reasons an employer may wish to settle a claim, including a cost-benefit analysis of anticipated attorney fees, removing the distraction and impact on company resources of a prolonged legal fight, and the potential impact on employee morale. While the confidentiality provision allows the employer to settle the claim and avoid negative publicity, the overriding goal is to prevent additional, more suspect claims from employees that are simply seeking a payout.

That is the rub. Many settlements occur prior to a lawsuit being filed. Such confidential settlements have the effect of creating a misleading perception of the employer and its culture. For example, look at the Harvey Weinstein claims that sparked the #MeToo movement. The Weinstein Co. had all employees sign nondisclosure agreements at the beginning of their employment, preventing the employees from saying anything negative about the company. As an added measure, Weinstein included confidentiality provisions in the settlement agreements reached with dozens of women he allegedly sexually harassed.

The result was that no one spoke about the serial nature of Weinstein's harassment until it had gone on for decades. Once he was exposed and the #MeToo movement gained momentum, the actions of additional serial harassers such as Roger Ailes, Bill O'Reilly, Matt Lauer, Steve Wynn, and Les Moonves came to light and it became clear their behavior had been enabled by the use of confidentiality provisions.

While confidentiality provisions have made it possible for instances of sexual harassers to hide their egregious behavior, there is a case to be made for their continued utility.

From the employee's perspective, there are personal considerations in which they may prefer to keep claims of sexual harassment confidential. Disclosure could cause embarrassment or additional emotional trauma, it may impact how they are viewed by future employers, knowledge of the claim may affect how friends and family treat the employee, it may trigger litigation in which the employee will have to either relive the harassment or be thoroughly investigated, or they may be subjected to victim blaming or shaming.

For the employer, having the flexibility to settle claims that may not have merit but will be costly in terms of productivity, attorney fees and to avoid a deluge of similarly nonmeritorious claims are reasons for the use of confidentiality provisions in settlement agreements.

A further concern for both the employer and employee is if settlements are not protected by confidentiality there is less incentive for the employer to pay large settlement amounts or to settle at all. The result would be the inefficiency of requiring lawsuits to be filed, subjecting the employee to the invasive litigation process and the employer to the exorbitant fees associated with defending such claims. Of course, the other side of the coin is the positive effect of exposing sexual harassers and potentially stopping their behavior and sparing future victims.

The federal and state governments have been searching for ways to address confidentiality and the settlement of sexual harassment claims in response to the #MeToo movement and the number of high-profile sexual harassment settlements exposed in the media.

The federal government took the first step when it passed the Tax Cuts and Jobs Act, adding a provision to the Internal Revenue Code disallowing deductions for any settlement subject to a nondisclosure agreement that is related to a sexual harassment or abuse claim, along with attorney's fees related to such a settlement. The enforceability of this provision has obstacles, but fundamentally it presents employers with the decision of whether to require confidentiality or the ability to deduct the settlement and attorney fees as an ordinary business expense.

Unfortunately, this provision appears to affect the employee as well. If they desire to include a confidentiality clause in the settlement agreement, the plain language of the new provision appears to prevent the employee from being able to take the above-the-line tax deduction for attorney fees, triggering taxes on money they do not receive.

Many states are taking steps to address the issue as well. New York banned the inclusion of nondisclosure provisions in settlements of sexual harassment claims unless agreed to by the complainant. Similar statutes that impact confidentiality provisions or nondisclosure agreements are being considered or have been enacted in Alaska, Arizona, California, Maryland, Missouri, New Jersey, Pennsylvania, Rhode Island South Carolina, Tennessee, Vermont and Washington.

Now that there is legislation and a new tax code provision, we can gather data over the next year to determine how prohibitions against confidentiality in settlement agreements related to sexual harassment claims will be affected. The expectation will be that in those states barring confidentiality provisions, employers will opt to fight the claim or reduce the settlement amount to appear that the settlement is for nuisance value. Then the question will be whether these statutes truly benefited the victims.

Dallas attorney Todd Shadle is the chair of the employment section of the Texas trial and appellate firm Godwin Bowman PC . Board certified in labor and employment law by the Texas Board of Legal Specialization, his practice includes counseling and preparation of policies, litigation, conducting investigations and dealing with state and federal agencies.