Loss of employment is an incredibly stressful and difficult experience. Combined with a divorce, it can become even more challenging and confusing. If a spouse’s employment ends with severance pay, the question arises as to whether an ex-spouse has a right to a portion of that severance pay. There are several possibilities that may occur to treat severance pay: It could be treated as the separate property of the recipient, it could be community property or partially community property, and it may or may not be considered income available for support. Unfortunately, the answer to the question of how severance pay is treated is not always clear and depends upon the circumstances leading to the severance.
QUESTION 1: IS THE SEVERANCE PAY COMMUNITY PROPERTY?
The initial question to ask when determining how to deal with severance pay is whether it is community property and therefore a “divisible” asset. If the right to the severance pay occurred during marriage, it is likely community property. If the right to the severance pay occurred before marriage or after the date of separation (like in the case of severance pay for future services), it is separate property and therefore not divisible.
QUESTIONS 2: IS THE SEVERANCE PAY INCOME AVAILABLE FOR SUPPORT?
The starting place to determine whether severance pay is income available for support is Family Code Section 4058, which says that income available for support includes “income” received from any source except money received as child support or “need-based” government payments. Generally, income available for support includes every source of money received, which includes severance pay. But what if the severance pay is community property and the other party is entitled to share in those monies in the property division? This is where the analysis becomes complicated. Additionally, the court will look at the period of time covered by the severance pay – payment for past services compared with payment for future lost wages is critical to the analysis.
CASE LAW IN CALIFORNIA REGARDING SEVERANCE PAY
California has a number of cases that deal with this issue that help to shed some light on this perplexing issue.
In the case of In re Marriage of Horn, the court found that Husband’s severance pay was a divisible asset and Wife was therefore entitled to a portion of the pay. Husband’s ex-employer, the National Football League, paid Husband a lump sum of $100,000 as pay for his eight seasons with the NFL. The court found that this was for “services previously rendered” and a form of deferred payment. The court particularly noted that the pay was contracted-for in Husband’s employment agreement and that Husband earned the “absolute right to receive because of the seasons he has played regardless of whether he experiences any involuntary loss of earnings.” (Horn, 181 Cal. App. 3d 540, 550 (1986)).
In contrast, the court in the case In re Marriage of Wright found that Wife had no right to a portion of the severance pay because it was a voluntary payment from employer as compensation for loss of future earnings. Unlike Horn, there was no provision in Husband’s employment contract that provided for the severance he received, but was rather given by ex-employer in its discretion after termination of employment in recognition of loss of earnings. So, like future earnings, such severance pay was treated as income that may be used in calculating support.
Given the constant case law regarding financial issues in dissolution, finances continue to be a highly confusing and fought over issue. Should you find yourself in need of legal services to help navigate this issue, the attorneys at Wilkinson and Finkbeiner are highly experienced and knowledgeable in the areas of support, financial division and dissolution. Please call or email us today using our Contact Us page.