What Is a Safe Harbor Law?

A safe harbor is a provision in a law that affords protection from liability or penalty when certain conditions are met. The safe harbor concept is used in several areas of law, including taxation, such as the provision for a Safe Harbor 401(k).

Safe harbor provisions are found in environmental law and apply to insider information and hostile takeovers in securities law. They're found in copyright laws—specifically the Digital Millennium Copyright Act—and even sex trafficking laws. 

What Is a Safe Harbor Law?

A safe harbor law is something of a legal loophole. It effectively says, "Yes, I did that, but..." A safe harbor can reduce or eliminate 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.

A safe harbor provision might apply if some unpreventable circumstance prohibited you from complying with a law, or if the law was so complex that most people couldn't comply.

How Does a Safe Harbor Work?

Safe harbor provisions came into the news in 2015 in relation to data transfer issues 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.

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.

Types of 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.

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% of the total costs are the result of direct labor and overhead costs from U.S.-based operations.

Several states have adopted or are in the process of adopting safe harbor laws to protect human trafficking victims from subsequently being charged for crimes such as prostitution and, in the case of minors, juvenile delinquency. Minnesota was one of the first states to enact this safe harbor provision in 2011.

How to Use a Safe Harbor Law

This is a highly complex area of law that you might not want to argue yourself, so consult with an attorney if you've stepped afoul of the law but think you might qualify for safe harbor protection. Reaching out to a lawyer or accountant might enable you to avoid costly penalties, or at least to reduce their impact.