What is a Safe Harbor Law or Provision?
A safe harbor is a provision in a law or regulation that affords protection from liability or penalty under specific situations, or if certain conditions are met. Sometimes a safe harbor reduces liability if "good faith" is demonstrated.
In other words, you thought you were complying with the law, but it contained some loophole that prevented you from doing so exactly. Or maybe some unpreventable circumstance prohibited you from complying, or the law's complexity was so complex that most people can't comply. You might not even have known about the law, so complying following it was impossible.
The safe harbor concept is used in several areas of law, including taxation, such as the provision for a Safe Harbor 401(k). It's found in environmental laws and applies in insider information and hostile takeovers in securities laws. It includes copyright laws—specifically the Digital Millennium Copyright Act—and sex trafficking laws.
Safe Harbor History
Safe harbor provisions came into the news in 2015 in relation to data transfer between the European Union (EU) and the U.S. for law enforcement purposes. This was a case in which a safe harbor provision was actually taken away, not invoked.
The EU had previously been allowing U.S. law enforcement agencies to transfer U.S. citizens' data from the EU under an old safe harbor provision. But the European Court of Justice ruled that this agreement was "invalid in light of what the court deemed insufficient U.S. privacy protections."
That is, the U.S. wasn't doing enough to protect the data of EU citizens and companies who were affiliates or subsidiaries of U.S. companies. The safe harbor concept effectively protected the U.S., but only to the extent that it protected the data.
Some Common Tax Safe Harbor Provisions
Section 530 of the Internal Revenue Code (IRC) includes a safe harbor provision relating to the classification of workers as independent contractors. Under this provision, a company is not liable for employment taxes if it can demonstrate that a reasonable basis for treating workers as independent contractors exists, and if the employer can meet three reasonable basis standards.
The Affordable Care Act includes a safe harbor for affordability for employee health care coverage. If it's not affordable, you can't be held to a responsibility to pay for it.
Another safe harbor provision is the IRS Special Accounting Rule that allows employers to treat non-cash fringe benefits provided in November or December as being provided in the following year.
The domestic production activities deduction for U.S. manufacturing businesses provides a safe harbor provision that allows businesses to take this deduction if at least 20 percent of the total costs are the result of direct labor and overhead costs from US-based operations.
The Digital Millennium Copyright Act of 1998 has several safe harbors. These provisions protect internet service providers (ISPs) from liability for copyright violations and other illegal activities of their customers.
This Is a Complex Area of Law
See an attorney if you've stepped afoul of a law but think you might qualify for safe harbor protection. This is a complex area of law that you might not want to argue yourself. Reaching out to a professional lawyer or accountant might enable you to avoid costly penalties, or at least to reduce their impact.