New Maryland Law Requires Employers to Gather Information on Settlement of Sex Harassment Claims

Q.  Are there any laws related to settlement of sex harassment claims in Maryland that I should be aware of?

A.  In response to the many high-profile scandals in the news, several jurisdictions have enacted anti-sexual harassment legislation. To date, Vermont, New York, and Washington passed anti-sexual harassment laws. Maine, North Carolina, Ohio, and New Jersey introduced similar statutes in state legislatures. The new legislation aims to reduce sexual harassment in the workplace by prohibiting waiver provisions in employment contracts, preventing non-disclosure and other provisions in sexual harassment settlement agreements, and providing new avenues for employee reporting and disclosure. Maryland is the latest state to say “#MeToo.”

On May 15, 2018, Maryland Governor Larry Hogan signed into the law the Disclosing Sexual Harassment in the Workplace Act of 2018 (the “Act”). Designed for transparency, the Act prohibits jury trial waivers and also imposes reporting requirements related to settlement of sexual harassment claims by Maryland employers.  Unlike many of the other laws, the Maryland law does not expressly prohibit nondisclosure provisions in settlement agreements.

The Act takes effect October 1, 2018.

Prohibition on Waivers

The Act prohibits Maryland employers, regardless of size, from requiring employees to arbitrate sexual harassment claims. The Act renders mandatory arbitration provisions as void against public policy. In addition, the Act prohibits an employer from taking any adverse action against an employee because the employee refuses to enter into any agreement containing an invalid waiver.

As we have written previously, mandatory arbitration provisions are favored under the Federal Arbitration Act, despite state law to the contrary. In fact, in a recent United States Supreme Court opinion, Epic Systems Corp. v. Lewis, the Court confirmed previous rulings in favor of mandatory arbitration of employment claims, upholding the validity of class action waivers in arbitration agreements signed by employees.  It is therefore likely that the prohibition on mandatory arbitration clauses will be attacked on the grounds that it is preempted by federal law. Similar state statutory provisions prohibiting mandatory arbitration have been found to be preempted.

Reporting Requirement

The Act also requires Maryland employers with 50 or more employees to submit a survey to the Maryland Commission on Civil Rights containing the following information:

  1. the number of settlements made by or on behalf of the employer after an allegation of sexual harassment by an employee;
  2. the number of times the employer has paid a settlement to resolve a sexual harassment allegation against the same employee over the past 10 years of employment;
  3. the number of settlements made after an allegation of sexual harassment that included a confidentiality provision; and
  4. information on whether the employer took any personnel action against the employee who was the subject of the settlement.

Employers must submit the first survey on or before July 1, 2020 and a second survey on or before July 1, 2022. The Commission will collect the employer-provided data and publish aggregate data on its publicly-accessible website, as well as provide, upon request, responses of individual employers to requirement number. 2.

Employer Action Items

With respect to the waiver prohibition aspect of the new Act, Maryland employers will have to decide whether to remove any provisions in employment agreements mandating arbitration of harassment claims, or take the position that the Maryland Act is preempted by federal law.

In addition, Maryland employers with 50 or more employees should prepare to comply with the survey requirements of the Act by coming up with a method to track and gather internal information on sexual harassment claims and settlements, as well as ensure that personnel files of the subjects of those sexual harassment claims are retained in order to complete the Commission survey.

Employers also should monitor for any future regulations or other guidance issued by the Commission that clarifies the Act’s employer reporting provision. For example, the Act does not address if the survey includes current and former employees and settlements outside of Maryland. Nor does the Act provide for any penalties or enforcement mechanisms if an employer fails to comply with the mandatory reporting requirements.

— Tracey E. Diamond and Sara Mohamed*, 2018 Summer Associate

* Ms. Mohamed was a 2018 Summer Associate, resident in the Philadelphia office. She is not admitted to practice law.

 

Confidential Harassment Settlements No Longer Subject to Tax Deduction

Q.  Has the #MeToo Movement led to any changes on how companies settle harassment complaints?

A.  While there are numerous legislative initiatives on the horizon intended to change how employers handle harassment complaints in light of the #MeToo Movement, the most significant federal change is a little known revision to the Tax Code recently enacted.

The Tax Cuts & Jobs Act prohibits either the employer or the employee from taking a tax deduction for (1) any settlement or payment related to a sexual harassment claim that is the subject to a non-disclosure agreement; and (2) attorneys’ fees related to such settlement or payment. The intent of the statute is to discourage parties from keeping harassment claims secret and thereby reduce the risk that the alleged harasser will strike again.

The term “related to” is not defined in the statutory language. It is possible that the settlement proceeds for any claim that merely mentions the word “harassment” may not be deductible, even if the majority of the allegations involve other issues.  However, we believe that the IRS likely will allow parties to allocate the portion of the proceeds that is for settlement of harassment allegations in those cases in which harassment is part of a larger suit involving other disputes.

The impact of the deduction for attorneys’ fees also is significant. Most claimants pay their attorneys on a contingent fee basis, meaning that the settlement proceeds are split between the claimant and the attorney, often as high as 60 percent claimant/40 percent attorney.  Since proceeds from an agreement containing a nondisclosure provision cannot be deducted, this means that the employee may not be able to deduct even that part of the proceeds that goes directly to his or her attorneys.  This is true regardless whether the employer pays the attorney directly, or pays the proceeds to the employee who then pays his or her attorney.

The new rule may have several detrimental consequences to both parties and the public. As a confidentiality provision is an important component of most settlement agreements, the new tax burden will make settlements more costly.  Employers may be less interested in pursuing such settlements, resulting in harassment claims clogging the courts.  Additionally, employees who would rather keep their claims private due to the sensitive nature of the allegations will have to face the public eye.

While it remains to be seen how the IRS interprets this new provision, both employers and employees must consider the tax consequences of any agreement that they seek to keep confidential.

–Tracey E. Diamond