Bonus or Bust: Court Treatment of Salary Bonuses
This week Lawyer Monthly gains expert insight into the subject of how work bonuses are treated by courts post separation. Julie Julie-Ann Harris, Partner and Head of Family at Coffin Mew, delves into the particulars of court treatment of bonuses acquired with spousal support and treatment of a bonus as a capital asset without no spousal support.
Whilst the FCA prefers to think of the ’fat cat’ bonus payments of old as vintage as the Aston Martin DB5, based on its position that remuneration practices were a ‘contributory factor to the market crisis’ during the last recession, many employees, especially those who work in financial services, continue to receive a complicated and dazzling array of salary ’top ups‘ each year.
Bonuses take many forms, being either contractual or discretionary (or a confusing combination of the two). Discretionary bonuses mainly reward success, while non-discretionary bonuses incentivise future performance. Discretionary bonuses are often paid as an annual reward following a successful year and non-discretionary bonuses are paid on an agreed schedule, when employees hit a defined target.
Bonus and reward structures are satisfied in different ways and are mainly dependent upon the business needs at the time. Many bonus schemes pay an annual lump sum via PAYE which is in addition to basic salary. Some businesses seek to reward hard work and encourage loyalty by gifting shares in recognition of an employee’s performance or long service but generally these schemes will have conditions attached that shares cannot be realised for a specific time period.
This means employees do not see the immediate benefit of the value until a certain point in the future. There are many more schemes that range in complexity and as ever it’s the quantification of value the court must establish before distribution.
When relationships are stable, bonus payments, in the main, fall into the family coffers for the family benefit but when the focus shifts to the ’benefit’ of the bonus during divorce or separation, the complex reward structures come under the microscope for examination.
There are two distinct elements to consider here. First, how the court seeks to achieve fairness where spousal support is necessary to satisfy need and the second is where spousal support does not feature.
At the outset and before either position is categorised, how is fairness balanced when it is necessary to recognise the conflict where a bonus is generated, using knowledge and skill built up during the marriage set against post separation industry.
In Miller v Miller; McFarlane v McFarlane [2006] UKHL 24, [2006] 1 FLR 1186 the court sought to strike a balance akin to arguments deployed when considering ’marital acquest’ to reflect that “the marital partnership does not stay alive for the purposes of sharing future resources unless justified by need or compensation.”
If spousal support is necessary and, on the assumption that historical bonus payments are consistent and relatively small, the court will usually add the bonus to salary to calculate a global figure. If past bonus payments have been unpredictable, the current thinking is to determine an amount of maintenance for ’ordinary’ expenses, which are paid from salary with an element of ’discretionary’ spending to be paid from the bonus payment. If the latter applies, then it is essential to put a cap on the sums paid to recognise that the sharing principle does not apply to bonus payments H v W [2-13] EWHC 4105 (Fam).
However, what if the case does not feature spousal maintenance? In consideration of the length of marriage, post separation accrual and the overall size of the bonus including any deferral period in the case where the bonus includes share options, the court has made varying awards from nothing to a proportion for the first-year post separation extending to term payments on a stepped basis. In B v B [2010] EWHC 193 (Fam) the court refused to divide the husbands bonus equally in recognition that a substantial proportion of the bonus was generated post separation and the wife could not establish a claim based on her needs alone.
In each case where a bonus features heavily, keep in mind the difficulty of pinpointing the future value of deferred share options and the difficulties that will arise if the recipient leaves employment before realisation; the suitability of a non-extendable term for the bonus element in order to protect future endeavours; the importance of capping entitlement in monetary terms rather than percentages in order to protect the paying party if they receive a particularly high bonus post separation and always take advice on any future tax implications.
As ever the court will retain autonomy. In summary, it is always a matter of balance and degree and as for future predictions of value of deferred shares, the most sensible observation is that of William Shakespeare “If you can look into the seeds of time, and say which grain will grow and which will not, speak then unto me.”
