Late last year, H.R. 1, informally called the Tax Cuts and Jobs Act, passed Congress and was signed by the President. While the overhaul of the U.S. tax code received much of the attention — it was a tax bill
after all — the bill also contained some key labor and employment changes that attorneys and businesses need to be aware of. The changes center mainly around tax credits and deductions for certain benefits but will also impact how employers can treat settlements of sexual harassment claims.
Sexual Harassment and Sexual Abuse NDAs
A key change that may impact the decision-making process regarding settlements in sexual harassment and abuse cases removes the ability to deduct any settlement in such cases if it is subject to a nondisclosure agreement (NDA). Where previously an NDA was routinely included in any such settlement, businesses will need to further weigh the costs and benefits of including an NDA. The change, contained in 26 U.S.C. §162(q), clearly prohibits the deduction of “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.” Take note that it is not just the settlement or payment amount but also all attorneys’ fees related to the settlement or payment. This could be a factor in negotiating settlement amounts
and even whether to settle at all. Further, questions remain as to how broad this provision will be construed by the Internal Revenue Service (IRS). Are general claims
Labor and Employment News releases and waivers nondeductible under this if sexual harassment and sexual abuse claims are not explicitly carved out? If multiple claims are settled in a single agreement, can a business deduct a portion of the settlement amount for claims that would otherwise be deductible? Lastly, if a sexual harassment or sexual abuse claim results in settlement, are all attorneys’ fees incurred in the defense of the lawsuit attributed to the settlement and nondeductible or only those directly attributable to the actual negotiation and settlement of the case? These are all items where further clarification will be needed from the IRS.
Paid Family and Medical Leave Credit The Family and Medical Leave Act
(FMLA) provides eligible employees working for employers with 50 or more employees with up to 12 weeks of unpaid leave. The tax bill provides a new incentive for employers to offer paid family and medical leave (FML) to employees by providing a general business tax credit equal to a percentage of the wages paid. To qualify, employers must offer at least two weeks of paid FML, as defined under the FMLA in 29 U.S.C § 2612(a)(1)(A)-(E) and § 2612(a)(3), separate from any other type of leave such as vacation, personal, medical or sick leave. The FML must be offered to both full and part-time employees, with part time employees receiving a pro-rata amount. A qualifying employee must have been employed for at least a year by the employer and must have made less than $72,000 per year. This number can increase each year as it is tied to 60 percent of the threshold for a highly compensated employee designation under the tax code, currently $120,000. Note that these employee qualifications are not for the employee to qualify for leave but for the wages paid by the employer for the FML to qualify for the tax credit.
If all these qualifications are met for both the employee and employer, the employer may receive a general business tax credit equal to 12.5 percent of the FML wages paid to a qualifying employee. The credit can
only be received if the employer pays at least 50 percent of the employee’s regular pay, whether hourly or salaried. However, if the employer pays FML wages at a rate higher than 50 percent, the business can
receive an additional quarter percent tax credit for each percent of wages above 50 percent the employee is paid up to a maximum of a 25 percent credit if the employer pays 100 percent. Tracking FMLA, this tax
credit is available for up to 12 weeks per employee per year. The FML credit is available for the 2018 tax year and will expire after the 2019 tax year if not extended by Congress.
Fringe Benefit Deductions and Exclusions
While not the typical bailiwick of labor and employment attorneys, the following are good items of which to be aware when advising clients, as they could affect whether a business will begin or continue offering certain fringe benefits and the value of those benefits to employees. Moving expenses, except for members of the military, are now generally taxable. Previously, an employee could claim a deduction, non-
itemized, for moving expenses when beginning a job in a new location or an employer could pay or reimburse the moving expenses as a tax-free fringe benefit. Now, an employee can no longer deduct, and an employer can no longer pay or reimburse moving expenses tax-free.
•Employers will no longer be able to deduct expenses in providing tax-free qualified transportation benefits to employees. The benefit, if it qualifies, can still be tax-free to the employee but is non-deductible by the employer.
•Employees can contribute pre-tax dollars for commuting, up to $260 per month, for both transportation and parking. However, if the employer is providing the contribution it is no longer deductible by the employer.
•Entertainment, amusement, or recreation expenses or any expenses used in connection with those activities can no longer be deducted. Also prohibited are any deductions for amounts paid for membership in any club organized for business, pleasure, recreation or social purposes. This is without regard as to whether the expense is directly related to or associated with the employer’s trade or business.
•The bill imposes a new 50 percent limit on the deduction for food or beverage expenses provided to employees at an employer-operated dining facility, with the deduction phased out completely after the 2025 tax year.
•The bill clarifies that achievement awards, i.e. safety awards, are taxable if they are cash or cash equivalents such as gift cards, meals, lodging or tickets. However, tangible property, like a t-shirt or mug, is not taxable. Further, an award that provides the ability to select a piece of tangible property from a range of options is treated as tangible property and not taxable.
•Employees can no longer deduct unreimbursed business expenses under miscellaneous itemized deductions. If the employer reimburses the employee, the reimbursement is tax free to the employee. However, if not reimbursed, it is no longer deductible.
Conclusion- While this list is not exhaustive, it does provide an overview of the key changes that businesses will need to consider going forward. Further, it could lead to changes in settlement negotiations and fringe benefits offered by many employers.
Don Boyd is the Director of
Labor & Legal Affairs at the
Ohio Chamber of Commerce.