Bonuses or lump sum payments are all sources of income and as such are capable of being included as a matrimonial asset during financial negotiations. In this article, we consider how bonus and lump sum payments are treated in a divorce settlement, and for how long after separation they might be considered shareable with a former spouse or civil partner.
Bonuses often include stock options or cash; they can be discretionary or contractual, payable immediately or deferred. It can be common for deferred bonuses to be paid much later with a view to ensuring the employee remains working for their employer; unpaid bonus entitlements are usually lost if the employee leaves the company. They also tend to be based on the employee’s performance.
Cash bonuses
Cash bonuses are paid in addition to an individual’s salary, although there are wide variations and fluctuations as to how they are paid. Some bonuses are paid on an open “discretionary” basis, some are paid upon a set of personal and/or company targets being met, and others paid on a sliding or uplifting scale. Most commonly, they are paid annually, but if they are closely linked to sales targets, they can resemble commission and be paid much more frequently as a short-term incentive.
If a cash bonus is paid, then the question of whether the payment is considered a normal part of someone’s income arises. However, the bonus is not guaranteed in the same way as salary, and may be perceived as unfair to have this expressed as a figure. It can therefore make more sense to express the amount as a percentage of the bonus.
Bonuses paid as shares or stock options
Very often, in order to incentivise staff, companies offer share option schemes. This allows an employee to purchase stock at a fixed value, no matter the value at the time of purchase. Stock options may not be considered as part of income and may well be added into the capital pot instead. However, this does depend on the circumstances in which they are given, and also of relevance is the frequency this happens in the income stream of that individual.
Bonuses received before separation
If you are already in receipt of the bonus and the money is sitting in your bank account, then to the extent it is not being used towards day-to-day expenses, it is likely to be considered a capital resource, and therefore capable of being shared on divorce. Matrimonial capital is generally subject to the principle of sharing, the starting point being to share it equally. Although this may not necessarily be the outcome when factoring in meeting both spouse’s reasonable housing and income needs. This is because the principle of needs, trumps everything else.
If matrimonial resources can be used to adequately meet both parties reasonable needs, and one party has a bonus in their account earned after separation, then it may be treated as a non-matrimonial asset.
Bonuses received post-separation
The starting point for the family court is 50:50 division of all matrimonial assets. In applying this principle, the court looks at whether there are any “departure points” that go in either party’s favour. For example, does fairness in a particular case justify a departure from the equality principle? One departure could be post-separation accrual of assets, such as the case of one party receiving a bonus after the parties have separated.
Generally speaking, post-separation income is not subject to sharing. However, post-separation capital can be. Whether such funds are treated as income or capital is therefore paramount in financial settlement negotiations or proceedings. The higher courts have provided some guidance on this matter, although different courts/judges have taken vastly differing approaches, including treating post-separation bonuses as:
- A future income stream and not a capital asset that is capable of being shared
- A capital asset, but identifying a matrimonial element by treating it as accruing on a straight line basis from the beginning of the earning year to the point of settlement
- A matrimonial asset to be shared on the basis that the risk in an asset that has not yet been received
The above illustrates that there is no one formula that can be applied when it comes to dealing with post-separation bonuses on divorce. With so many contradictory approaches about how they should be treated, the division of bonuses frequently becomes a contentious issue for many families.
The situation appears to have garnered some clarification in 2021, where the family court found that whilst bonuses awarded during the marriage should be deemed capital matrimonial assets and shareable, bonuses awarded following separation should not be treated as capital and therefore are not capable of sharing. However, if the financially weaker party’s future capital and income needs cannot be met by sharing half the matrimonial assets, including deferred bonuses awarded during the marriage, then post-separation income (including potential bonuses awarded after separation) can be used to pay maintenance to the financially weaker spouse. Or, as an alternative, an additional lump sum be paid to meet their future financial needs. The duration of the maintenance, including the years of bonuses to be used, is likely to depend on when the receiving party can become financially independent.
Future proofing a financial order
Whether the court is making a financial order or a couple is negotiating a settlement, it is important to bear in mind the risks associated with the various types of assets and income involved. For example, if too much of the safer capital, such as cash savings, are paid in lieu of any share of deferred bonuses, it is important to be aware that the value of deferred bonuses can fall or be lost completely if the employee leave their employer. Once a final order is made, it is extremely difficult to revisit its terms. Assessing the risks, as well as the overall amount, should be considered carefully before a final order is obtained.
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