Your Bonus is my Bonus..... or is it?
The recent High Court case of H-v-W [2014)] has provided much needed clarity for that mystical question which taxes family lawyers and Judges alike –
What share of the bonus should be paid out to the ex husband or wife on divorce?
It is clear and accepted law that, in the event of a divorce or dissolution of civil partnership, one of the many Orders that the Court can make is spousal maintenance, and in straightforward cases, this is made by looking at the recipient party’s income needs and by considering this in light of each party’s income and earning capacity.
However, for some separating couples, the lifestyle enjoyed during the marriage is funded primarily by the bonus payments of one party which are discretionary and not a guaranteed part of their salary. So, how does the Court interpret and make a fair assessment of how much maintenance should be paid where bonus payments form a large part of annual income?
Over the years, many different approaches to this have emerged through case law but there has been no real clarity, leaving practitioners to interpret the case law as best as they could when it came to the vexing issue of bonus payments.
H-v-W involved a Husband and Wife who enjoyed an extremely comfortable lifestyle together courtesy of the Husband’s role as Managing Director of a Bank. They had been together for 19 years and had one adult child. The Husband, on top of earning £250,000 gross per year, also received a cash bonus of nearly £225,000 - £250,000 per year. At the first hearing, the District Judge made an Order on capital, pensions and income including a generous spousal maintenance award of £3,750 per month plus 25% of bonus payments for joint lives.
The case was appealed to the High Court by the Husband. Tthe Court ordered that it was necessary to take part of the spousal maintenance award from the Husband’s bonus income for the Wife but it imposed a cap on the total amount to be paid to the Wife of £20,000 beyond which the Husband would not have to pay 25% of his bonus to the Wife. So, if the Husband received a bonus of £200,000 then he would pay a maximum of £20,000. The Court set out that it was, in a case like this, entirely proper and correct to include the bonus payments for the purposes of spousal maintenance but that the Order should look to meet “needs” rather than “sharing”. The Court also made it crystal clear that, with bonuses being variable and not guaranteed, then the only way to assess the award was to do so on a percentage basis. Moreover, a cap on maintenance was a way to ensure that only the Wife’s basic needs were met. Her Ladyship Eleanor King J set out that:
"The inherent uncertainty of bonus payments provides, in part, the reason why the setting of a cap is essential in order to avoid the unintentional unfairness which may arise as a consequence of a wholly unanticipated substantial bonus paid to the H."
This follows a general change in the way the Courts have been deciding matrimonial settlements when it comes to spousal maintenance over the past years. The trend of a less generous approach to spousal maintenancecontinues, with a focus more towards Orders being made for a limited term or, as in this case, with limitations. The intention being that parties should be able to move forward knowing that their future wealth is not at the mercy of the sharing principle of separation on divorce for eternity.
In summary, although clearly for many where bonus payments are an essential part of their earnings, there is at last some clarity as to how the Court will consider payment of bonuses on separation. Many of those whose income is based on large bonuses will breathe a sigh of relief in the light of this case that their future earnings – in terms of bonus payments at least – are in some way protected.
Taking this on board, good quality legal advice can ensure you make an informed choice. The family team at Whitehead Monckton have a wealth of experience providing guidance and advice in all areas relating to separation or divorce. If you wish to discuss any of the points raised in this article, please contact a member of the Family Team.