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Family Law Reader

Family Law Reader

February 2003

Classification of a “Signing Bonus”

Laura W. Morgan

How should a court classify a “signing bonus”? That is, should a bonus that is received during the marriage upon the acceptance of an employment agreement, but actually earned after the marriage, be marital or separate property?

Ostensibly, since the funds are received during the marriage, the funds are marital property. This first blush analysis, however, overlooks the important fact that property received in return for services performed is “acquired” when the services are actually performed. For example, a bonus received at the end of an employment period is acquired throughout the employment period. Thus, if a husband received a bonus after the date of classification for work performed during the marriage, the bonus is marital property. In re Marriage of Peters, 326 Ill. App.3d 364, 760 N.E.2d 586 (2d Dist. 2001); The converse is necessarily true as well: a bonus received during the marriage for work performed after the marriage is separate property. O’Neal v. O’Neal, 55 Ark. App. 57, 929 S.W.2d 725 (1996) (husband received $35,000 forgivable loan on eve of divorce, with 25% of balance to be forgiven after each of next four years of service; loan was compensation for post-marital services, and thus separate property); In re LaLone, 469 N.W.2d 695 (Iowa 1991) (advance compensation for work to be performed after the marriage).

Reiss v. Reiss, 654 So.2d 268 (Fla. 1st DCA 1995) concerned a “signing bonus” in particular. In that case, a month after the husband filed the petition for dissolution (some sixteen months after the parties separated), he started working for a different investment firm. As an inducement to make the change, his new employer paid him $122,784.00 on December 18, 1992. The wife argued that the “signing bonus” was given to the husband in compensation for the large investment portfolio and deferred compensation benefits he acquired during the marriage. The argued that the bonus was given for the portfolio the husband would bring with him to Prudential and the deferred compensation benefits he abandoned by leaving Shearson. The trial court ruled, and the appellate court agreed, that the signing bonus was given in consideration for work efforts performed during the marriage at Shearson and for the retention of certain existing clients the husband would bring with him to Prudential. Further, the signing bonus was not to replace post-marital earnings or commissions lost by the husband. In essence, the trial court ruled that the signing bonus was payment for goodwill: the husband retaining clients and bringing them with him from Shearson to Prudential.

The dissent sharply disagreed:

The evidence does not support the trial court’s implausible finding that Prudential paid the former husband for his “work efforts performed at . . . Shearson.” Nor was there evidence to support the finding that Prudential did not pay the former husband partly to tide him over by “replacing post-marital earnings or commissions lost,” i.e., forgone, by virtue of his departure from Shearson.
Mr. Grippi’s testimony was clear about the two reasons for the “signing bonus”: to compensate appellant for “down time” he would experience in transferring from one firm to another and to give appellant an incentive to change firms.
Thus, if the proof is clear that the “bonus” is for post-marital efforts, and not in any way compensation for marital efforts or payment of marketable goodwill, then the bonus should be considered separate property. “As income he earned after the designated date for classifying marital assets, the former husband’s transitional income was his separate property. The trial court erred in holding that the signing bonus was a marital asset subject to equitable distribution, and its order should be reversed in this respect, too.”

654 So. 2d at 272.

Contracts for services follow the same rule: payments received under a contract as consideration for services are “acquired” when the services are provided, not when the contract is signed. For example, in In re Anderson, 811 P.2d 419 (Colo. Ct. App. 1990), the husband signed a contract as a professional basketball player during the marriage. The millions of dollars due under the contract, however, and any money received under the contract during the marriage were separate property because the husband played the games and earned the salary after the marriage. Accord In re Sewell, 817 P.2d 594 (Colo. Ct. App. 1991) (professional football player); Chambers v. Chambers, 840 P.2d 841 (Utah Ct. App. 1992) (professional basketball player).

A “signing bonus” signed in connection with the sale of a business may also be considered a covenant not to compete, because it is a contract to keep the seller of the business working for the same business and not start a competing business. Consideration for a covenant not to compete is compensation for post-marital efforts, and thus separate property. Ellerbe v. Ellerbe, 323 S.C. 283, 473 S.E.2d 881 (Ct. App. 1996).

A caveat is in order, however. When a covenant not to compete or a contract for future services is made in connection with the sale of a business, the court is not bound by the figures stated in the contract. In Hoeft v. Hoeft, 74 Ohio App. 3d 809, 600 N.E.2d 746 (1991), the husband sold his marital property dental practice for $60,000. At the same time, he accepted $250,000 in return for a covenant not to compete. The husband argued that the entire $250,000 was consideration for future services, and the trial court agreed. On appeal, the trial court was reversed. The practice had earned $120,000 in the previous year, and the husband’s expert admitted that $60,000 was a low value for the practice. In light of these facts, the court found that the reasonable value of the covenant not to compete was $60,000.

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