An article published in American Bar Association Business Law Today, “Legal Fee Tax Deductions for Plaintiffs Under Current Law,” examines how tax treatment of legal fees continues to shape the economics of employment litigation for both employees and employers. The article highlights that, despite statutory carve-outs, tax consequences remain uneven and frequently misunderstood—often influencing settlement strategy more than the underlying merits of a claim.
As the ABA explains, while certain employment-related claims—such as discrimination, retaliation, and whistleblower actions—permit above-the-line deductions for attorneys’ fees, many other workplace disputes do not. This distinction can materially reduce a plaintiff’s net recovery and complicate settlement negotiations, particularly where gross settlement numbers obscure after-tax outcomes. For employers, these dynamics affect not only settlement valuation but also how payments are structured, reported, and allocated.
Beyond individual tax liability, the ABA analysis underscores broader governance and risk considerations. Settlement agreements that fail to account for tax characterization—wages versus non-wage payments, emotional distress allocations, fee treatment, and reporting obligations—can expose employers to IRS scrutiny, penalties, and follow-on disputes. Internal communications and deal structures surrounding settlements may later be examined in tax audits or related litigation.
From a legal and risk-management perspective, employment disputes increasingly require coordinated legal and tax analysis. Plaintiffs’ counsel must evaluate how tax treatment impacts client recovery, while employers must assess withholding obligations, information-reporting risk, and the potential downstream consequences of poorly structured settlements.
The takeaway is that employment litigation risk does not end with resolving liability. Tax consequences—often overlooked until late in the process—can materially alter outcomes and create avoidable exposure if not addressed early and deliberately.
Outside Legal Counsel LLP advises employers, employees, and boards on employment-litigation strategy, settlement structuring, tax-aware risk management, and governance considerations arising from workplace disputes. Contact us today.
This is not legal advice and is attorney advertising.
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