How are salary payments and bonuses treated by the courts on divorce?

Generally speaking, future earnings , which represent the future sources of income that a party in a divorce will receive, are not classified as a matrimonial asset to which the sharing principle applies (see the case of Waggott v Waggott). However, this does not mean that such income is not taken into account as a resource and relevant for the purposes of calculating a spousal maintenance order.

Salary

During the process of financial proceedings upon a divorce, the court expects that the financial status quo should remain the same in the interim. If, for example, one party was financially dependent on the other prior to separation, then the expectation would be that this provision would continue through an arrangement of interim maintenance (provided, of course, that the paying party continues to have sufficient income to meet such maintenance).

In a financial settlement, salary is treated differently to those matrimonial assets which are divided upon divorce. Divorcing spouses do not have a sharing claim in relation to the other’s salary and instead the court will consider salary in the context of needs – in particular, whether a spousal maintenance order is appropriate because, for example, the matrimonial assets in the pot are not sufficient to meet a party’s needs. With that being said, the courts will expect the parties to maximise their earning capacities after a divorce and so the terms of any maintenance payments should only be so long as to allow the recipient to do so and meet their needs.

The prevailing wind is to avoid the ordering of spousal maintenance where possible and actually, the courts have a duty to consider whether a clean break is possible in any given case. As a result, alternative mechanisms are available whereby maintenance can be capitalised into a lump sum for the recipient to invest and drawdown annually – creating a source of income without the ongoing attachment which spousal maintenance via periodical maintenance payments entails. This not only avoids a situation where one party remains financially linkedto the other, but a lump sum can also provide more financial security to a partyin the long term.

Bonus payments

The court’s approach to bonuses varies depending upon when the bonus was earned.

Bonus which has already been received

Bonuses that a party is already in receipt of during divorce proceedings that are sitting in a bank account and not utilised towards day-to-day expenses are likely to be considered as a capital resource – like a pot of savings. Such bonusesare treated as matrimonial and therefore subject to the principle of sharing.

Bonus earned during marriage but not yet received

A similar principle applies to those bonuses which have not yet been received but were earned during the marriage.

Bonus earned post-separation

If the bonus was earned post-separation, however, it may be treated as non-matrimonial in nature. There is, nonetheless, a line of case law (stemming from the case of Rossi v Rossi) to the effect that a post-separation bonus should not be classed as non-matrimonial unless it relates to a period which commenced at least 12 months after separation.

Moreover, even where classified as non-matrimonial, such bonuses can still be invaded for the purposes of meeting needs.

Future and discretionary bonuses

Future bonuses are more likely to be treated as an income resource, which may not be shared on divorce but willbe considered as a financial resource to meet the needs of both parties if necessary.

Such bonuses may be discretionary. These bonuses are often paid as an annual reward following a successful year. Since discretionary bonuses are not guaranteed and are subject to certain conditions, they may be treated differently than guaranteed bonuses. The court will consider the likelihood of receiving a discretionary bonus when determining the value of the bonusin the context of financial remedy proceedings. Again, the court will first consider the financial ‘needs’ of the spouses in making any orders.

For example, in H v W [2013] EWHC 4105 (Fam) the bonus in question had historically accounted for a significant proportion of the parties’ income and was relied upon throughout the marriage. The judge at first instance ordered that 25% of that bonus be paid to the dependent spouse annually for maintenance. On appeal, a cap was imposed upon this award. To ensure fairness, in such instances, maintenance is limited to a level that does not exceed what was required to meet the claiming spouse’s needs as determined by the judge.

Deferred stock schemes

Deferred stock schemes add another layer of complexity. Whilst over time the amount of a cash bonus might fluctuate in ‘real’ terms, the future value of a deferred stock scheme is even less predictable. The two most common types of deferred stock schemes in family law matters are:

• Stock options – where employees are offered shares at a particular price which vest on a certain future date (commonly in 3 years).
• Restricted Stock Units (RSUs) - where employees are granted a certain number of shares each year without any purchase.

As with other bonuses, the courts have been seen to grapple with how deferred bonuses should be dealt with upon divorce:

a) Capital to be shared as any other matrimonial asset; or

b) Income, to be considered as a financial resource in the context of needs.

In summary, the courts approach is that:

• Bonuses earned during marriage should be considered capital matrimonial assets and be shared, however bonuses earned after separation generally should not (subject to the 12 month rule).
• However, if the financially weaker party’s future income needs cannot be met by sharing half of the marital assets, including bonuses earned during the marriage, then post-separation income which includes potential bonuses awarded after separation, can be used to pay maintenance or as an additional lump sum to meet their future financial needs.

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