Building Your Business Operations & Success What Is a Safe Harbor Law? Definition and Examples of Safe Harbor Laws By Jean Murray Jean Murray Facebook Twitter Jean Murray, MBA, Ph.D., is an experienced business writer and teacher who has been writing for The Balance on U.S. business law and taxes since 2008. She has taught accounting, business law, and business finance at business and professional schools for over 35 years, has authored several books on saving money and simplifying your business, and was the owner of startup-focused company Emence Enterprises, LLC. learn about our editorial policies Updated on February 24, 2021 In This Article View All In This Article What Is a Safe Harbor Law? How Does a Safe Harbor Work? Types of Safe Harbor Provisions How to Use a Safe Harbor Law Photo: Photo Rich Legg | Getty Images 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. Note The Affordable Care Act included a safe harbor for affordability for employee health care coverage. Employees couldn't be held responsible for paying the tax penalty for not carrying coverage under the terms of the Affordable Care Act if their employer didn't provide coverage that was affordable for them. The Tax Cuts and Jobs Act repealed the mandate penalty effective 2019. 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. Note 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. 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. Key Takeaways A safe harbor provision in a law effectively acknowledges that a wrongdoing has been committed, but it was justified due to certain circumstances and therefore not punishable in whole or in part.These laws gained some notoriety in 2015 over a dispute between U.S. law enforcement and European Union.Safe harbor provisions can include someone honestly believing they were complying with a law, only to find out that they weren’t due to misunderstanding or misinformation.Safe harbor provisions are included in numerous areas of law, including criminal and tax law. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Federal Trade Commission. "U.S.-EU Safe Harbor Framework." Accessed Aug. 29, 2020. IRS. "Worker Reclassification – Section 530 Relief." Accessed Aug. 29, 2020. U.S. National Library of Medicine. "Implications of the 2017 Tax Cuts and Jobs Act for Public Health." Accessed Feb. 24, 2021. IRS. "Publication 15-B (2020), Employer's Tax Guide to Fringe Benefits." Accessed Aug. 29, 2020. Digital.gov. "Digital Millennium Copyright Act." Accessed Aug. 29, 2020. The Advocates for Human Rights. "Safe Harbor for Youth." Accessed Aug. 29, 2020.