How are Redundancy Payments Treated in Divorce?
If you’re facing a property settlement negotiation, don’t forget to take into account any past or potential redundancy payouts for you or your partner – after all, it’s a marital asset like everything else.
What is a redundancy payment?
Also known as severance pay, redundancy pay is an employer’s termination payment, which is available to eligible employees based on their continuation of service.
Redundancy during or after separation
When you are disclosing your personal assets and liabilities for the purpose of a property settlement determination, you are required to disclose any redundancy payment – gained or expected.
That’s right – even if the redundancy payment is received just after the separation takes place you still need to disclose it.
If you don’t, you could risk having any financial agreement made thereafter set aside by the court and the case reopened.
Why? Because the law effectively treats superannuation, redundancy and long-service lump-sum payments as having been accumulated over the years of marriage. It therefore follows that both parties are entitled to the division of those assets, subject to certain exceptions and circumstances.
Case in point
This was explored in the case of Ferraro and Ferraro [1992] FamCA 64. The question of “what is property” was central to the court’s exercise of its jurisdiction under section 79 of the Family Law Act 1975 (Cth).
Section 79(1) empowers the Family Court to make such orders “as it considers appropriate altering the interests” of the parties to a marriage or former marriage in the property of the parties or either of them, including an order for settlement of property.
By section 4 of the Act, property is given a wide definition and is described as “property, in relation to the parties to a marriage or either of them, means property which those parties are, or that party is, as the case may be, entitled, whether in possession or reversion.”
In Burke (1993) FLC 92-356 Fogarty J also discussed the nature of redundancy payments.
His Honour held that: “A redundancy payment is capable of being regarded as a contingent right analogous to insurance which is intended to provide an accumulated safeguard against loss of wages and other benefits during an employee’s working life and which can be turned into a cash payment should the employee’s position become redundant.
“For the purpose of s79 of the Family Law Act, that contingent right is therefore an accruing potential financial resource of the employee party which is transposed into property where the conditions for its payment arises.
“That is, until an offer of redundancy is accepted, no chose-in-action arises and the entitlement is not property of the parties within the meaning of s79.”
His Honour’s decision has been widely adopted.
Post-separation redundancy
In the case of I & I [2004] FMCAfam 203 (6 May 2004), one of the questions discussed was whether funds received by the husband post-separation should be notionally added into the asset pool.
This is obviously a more complicated scenario, especially when proceedings are commenced significantly after the date of separation – as was the case here.
In this case, the court held that although the husband’s redundancy was paid years after the separation, the wife in fact contributed to it under s79(4)(c) of the Act.
The court’s reasoning was that by taking overwhelming responsibility for the children and home (including while the parties were separated), the wife freed him of demands that may have restricted his capacity to become the reliable and valuable employee he obviously became to his employer.
However, the court noted that too many years had lapsed since separation to be satisfied that the wife also contributed to his long service leave and annual leave portions of the pay out.
Exception to the rule
Not all redundancy payments will be considered joint contributions when dividing property.
For example, if the redundancy package includes a payout for a loss of future earnings, the court may find that, because these benefits relate to post-separation income, they should not be subject to division.
This was the situation in the recent case of Zimin & Nickson [2014] FCCA 206 (26 February 2014).
In this case, the wife received a redundancy payment of $12,840.44 in 2013. The husband sought to include the redundancy package as a joint asset.
This was resisted by the wife, who said that the redundancy package represented compensation for the loss of future wages, including the loss of benefits such as sick and holiday pay. As she could no longer access these payments, it was submitted that the payment was not referrable to the parties’ marriage. His Honour Judge Brown agreed.
When it comes to dealing with parties’ contributions, it helps to be honest and upfront about current and future entitlements. If you’re concerned about significant changes to your income, consider this factsheet of ways to stretch your money after separation.
At Amicus Lawyers, we can help you maximise your marital asset pool and develop a financial agreement that will serve both parties well into the future.