§ 7.13 Long-Term Employment Contracts

• Jurisdiction: United States
• Publication year: 2021

§ 7.13 Long-Term Employment Contracts

There are very few divorce cases that discuss the characterization of money payable under a long-term employment contract. It is unclear whether courts would extend the pro rata pension characterization approach¹⁰⁹⁰ to such a contract right, or whether the inception of title rule¹⁰⁹¹ would be applied. Under the inception of title approach, the contract benefits would be characterized according to the marital status of the employee when the contract term began. Any services rendered after a change in marital status would create a reimbursement right. If the value of the services, for reimbursement purposes, is calculated merely by applying a pro rata approach to the total compensation due over the life of the contract, the result under the inception of title approach would be quite similar to one reached under a pro rata approach. However, if the reimbursement amount is calculated by attempting to calculate the reasonable value of the services, this amount might not correlate with the compensation due under the contract. Pursuant to a pro rata approach, the periodic compensation due under the contract would basically be characterized according to the marital status of the employee at the time the particular payment is due.

Some long-term employment contracts are quite simple. They provide for a monthly or yearly salary, and the compensation payment period is identical to the period services will be rendered by the employee. Many variations can be encountered, however, that can complicate property characterization. For example, some long-term contracts provide for various types of signing bonuses to induce the employee to sign.¹⁰⁹² The employee normally receives a lump-sum payment of a certain amount when the contract is signed, and the periodic payments are received over the life of the contract. For characterization purposes, should the character of the signing bonus be determined by the spouse's martial status when the bonus is received, or should the bonus be allocated over the life of the contract? The latter seems preferable. Another type of characterization complication arises when the compensation period does not correlate with the period of service. This structure may result for tax planning reasons.

A California case involved a long-term employment contract signed during marriage.¹⁰⁹³ The contract specified that the employee, a movie actress, would make herself available for one movie each year. In exchange...