A Divorce, A Bonus, A Dispute
Published in Chicago Lawyer Magazine, November 2013
By Daniel Stefani
Most compensation these days has two component parts – base salary and discretionary cash, also known as a noncash bonus.
Typically, a bonus is paid either at the end of the year in which it is earned or a few months after the completion of the calendar year when it is earned.
What is the fair and equitable way of treating bonus income in a divorce situation in which the employment efforts put forth during the marriage yield the payment of a bonus after the dissolution of marriage? It has always seemed fair and equitable that to the extent a bonus is paid after the dissolution of marriage, but it was partially earned during the marriage, it would seem fair to treat a certain portion of the bonus as marital property.
In a case of first impression, the 1st District Illinois Appellate Court issued the opinion of In re Marriage of Wendt, 2013 WL 4428901 (Ill. App. 1 Dist.).
In Wendt, the sole issue was whether the husband’s 2012 bonus from his employer, potentially paid in February 2013, is marital property. The husband and wife were divorced in late September 2012 and, as such, the wife claimed that nine-twelfths of any bonus the husband would receive in 2013 for 2012 efforts was marital property because it accrued during the marriage. The husband claimed that it was nonmarital property because it was speculative and discretionary and, therefore, had not been earned during the marriage. The trial court found that the bonus was not marital property, characterizing it as an expectancy and not a contractually enforceable right. The appellate court affirmed.
In Wendt, as part of the judgment for dissolution of marriage, the husband was to pay the wife 20 percent of any net bonuses received in the future. As such, the court first pointed out that no matter the outcome on the issue of whether nine-twelfths of the husband’s bonus was marital, any bonus received by him in 2013 was to be expressly included in the calculation of his child support obligation.
The wife claimed that a portion of his bonus accrued during the marriage qualified as marital property since it was a contractual right and not an expectancy, drawing an analogy to a stock bonus. The husband claimed that the bonus was not property but merely future indeterminate income since he needed to be employed on the date that the bonus was distributed. Also, the bonus was purely discretionary on the part of the employer. The trial court stated that the husband’s 2012 bonus, if all paid in February 2013, is not a contractually enforceable right; is not marital property as it was not acquired during the marriage; the husband had to be working there to receive the bonus; and it is an expectancy and not a written contract of employment.
The primary reason the appellate court relied on was that the husband did not have a written employment contract, making his employment with his employer at will. The court reasoned that, as a result, the husband did not have a contractual right to receive a bonus by virtue of having signed an employment agreement providing for one.
There is no case in Illinois that deals with the issue of a cash bonus when there was an employment contract, but the court seemed to indicate that it may reach a different conclusion if there was a written employment agreement. The court further justified its finding of the speculative nature of the bonus by stating that there was one year of employment when the husband did not receive a bonus. This aspect of the court’s finding seems counterintuitive since the court could simply have taken an “if, as and when” approach which would eliminate the speculative nature of such bonus.
The court distinguished between the case law cited by the wife as to certain contingent stock bonuses as being considered marital property primarily because the payers had a written employment agreement. The wife cited In re Marriage of Peters, 326 Ill.App.3d 364 (2001). In Peters, the husband executed an independent agreement with his employer which provided for his receipt of certain potential stock bonuses after 10 years of employment. The parties divorced after five years and the trial court determined that the stock bonus was not marital property because it was future compensation for future efforts and his receipt of the bonus was speculative.
On appeal, the appellate court reversed, concluding that part of the bonus could be marital property. The Peters court also noted that nonvested stock options acquired during the marriage were marital property when exercised after the marriage. Again, stock options granted during the marriage but which vest after the marriage could be analogous to the cash bonus situation. However, stock option grants are written and, therefore, considered a contractual right if certain obligations are met by the grantee.
It would seem that if there was a written employment agreement that provided for a discretionary bonus, the result may have been different, so Wendt fails to unequivocally answer the question of whether the cash bonus paid after the dissolution of marriage but earned, at least in part during the marriage is marital property.