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Labor & Employment Law Tidbit Series: Tax Reform Impacts Settlement of Harassment Claims

McV Labor & Employment Practice Group

January 4, 2019

As we welcome the new year, we remind you that effective January 1st  the Puerto Rico tax reform introduced by Act 257 of 2018 impacts the tax treatment of settlement payments made by employers in harassment claims.  This amendment provides that employers will no longer be allowed to reduce from their taxable gross income any indemnification payments and related legal fees made in harassment cases, if they are subject to a non-disclosure agreement (“NDA”). Therefore, employers in Puerto Rico are advised that if they intend to tie such indemnification payments to an NDA from the employee, they should first consider the tax implications of an NDA requirement.   

Be advised that this amendment to the P.R. tax code disallowing the deduction of payments tied to NDA’s is not  limited to indemnifications for sexual harassment claims.  That is, it applies to all types of harassment indemnification payments under the P.R. and U.S. laws, such as payments related to harassment claims based on age, sexual orientation, gender identity, nationality, disability, religious beliefs, or other protected categories under P.R. and/or U.S. laws. 

We strongly encourage employers to renew their L&E compliance programs.  Updated trainings on sexual and other forms of harassment and the implementation of anti-retaliation protocols should become a priority for all employers in 2019. 

The content of this McV Alert has been prepared for information purposes only. It is not intended as, and does not constitute, either legal advice or solicitation of any prospective client. An attorney-client relationship with McConnell Valdés LLC cannot be formed by reading or responding to this McV Alert. Such a relationship may be formed only by express agreement with McConnell Valdés LLC.

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