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Early Retirement Enhancements: Another View

By Jennifer Jackson, JD (Family Law News, Vol. 17, No. 1)

It is respectfully submitted that the analysis above, while convenient, might be a mathematical/linguistic approach to what is in actuality a legal issue. For the sake of argument, a legal analysis of - for the sake of example - the University of California VERIP 3 benefits follows, which reaches the opposite conclusion:

Intent

The inquiry into whether post-separation benefits are separate or community property begins with a threshold analysis of the purpose of the benefits. In re Marriage of Horn (1986) 181 Cal.App.3d 540. Two branches have sprouted from that root inquiry: one line of cases holding that certain types of "termination" or "severance" pay are community property, and the other line of cases holding that other types of these benefits are separate property.
A third line of cases - subsumed within the separate property cases - relates strictly to disability benefits. These cases begin their analysis with the date the entitlement was actually "purchased", when "payments" were made toward the benefits, and whether or not the community realized the benefit of its bargain. In re Marriage of Elfmont (1994) 94 C.D.O.S. 1227.

In any analysis, it must be remembered that the terms "termination" and "separation" are not interchangeable. "Termination" relates to the date employment ends, and "Separation" relates to the date on which the employee and her or his spouse separated.

Cases in which post - termination benefits are held to be community property.

The line of cases which have determined post-Termination benefits to be community property have based this characterization on the following findings:

  1. The recipient has an absolute right to receive the severance pay, which right is secured prior to Separation (ex.: part of the underlying employment contract); and/or
  2. The benefits are compensation for [as distinguished from recognition of] past services, performed prior to Separation.

In re Marriage of Skaden (1977) 19 Cal.3d 679 is usually looked to as the first of such cases. The employee in Skaden was an insurance agent whose employment contract provided that upon Termination, he would receive a percentage of post-Termination premiums paid to the company on insurance policies posted to his account as of the date of Termination. These benefits were deemed community property even though part of the benefits derived from policies placed after Separation, because the right to receive the post-termination percentage of the policies - whenever placed - was secured by a contract signed prior to Separation.

The next of these cases, In re Marriage of Horn (1986) 181 Cal.App.3d 540, held that the severance benefits paid by the National Football League were community property, because they were based on a) an absolute right to receive the benefits and b) were compensation for services performed [substantially all during the marriage.]

Horn distinguished itself from the separate property line of cases by noting that post-Termination payments are characterized as separate property only if a loss of work is forced upon the employee; whereas the NFL benefits did not relate to any loss of work: they arose as part of the employment contract after a certain number of years of employment, and would definitely be paid in the future.

Cases in which benefits are held to separate property.

In the line of cases which have determined benefits to be separate property, that characterization is based on the following findings:

  1. The benefits replace lost present income, even if:
    ! Benefits are based on years of past service;
    ! The right to receive the benefit is by contract; and
    ! Termination is voluntary; or
  2. The employee "purchased" the benefit post-Separation.
    The first of the separate property line of cases, In re Marriage of Flockhart (1981) 119 Cal.App.3d 240 found that a "weekly layoff benefit" was present compensation and therefore the separate property of a Park Services employee who had lost his job because of cost of expanding Redwood National Park. He received the payments because of his "status" as an "affected" employee; therefore, the purpose of the post-Termination benefits was to compensate for the loss of present income.

The Court in In re Marriage of Wright (1983) 140 Cal.App.3d 342 found that the purpose of the post-Termination benefits paid to a hospital administrator who resigned voluntarily was to recognize the difficulties he would encounter in securing future employment as a hospital administrator [and therefore replaced lost post-Termination income]. The Court pointed out that the severance pay was not part of the original employment contract, and on that basis distinguished its holding from Skaden.

In re Marriage of Kuzmiak (1986) 176 Cal.App.3d 1152 found that Congress' clearly stated purpose prevailed. Here, Congress intended Air Force severance pay not as compensation for past services, but "to assist the service member during the transition period" to civilian life. Id., at p. 1157. This is so even though the severance pay was based on the number of years of past service. Id., at p. 1157

In the most recent of this line of cases, In re Marriage of DeShurley (1989) 207 Cal.App.3d 922 the separate property severance package is similar to the UC situation. In DeShurley and in the UC situation, both companies were forced to offer Termination options to their employees to reduce the work force.

Mr. DeShurley was one of the Continental Airlines pilots who went out on strike; the company subsequently filed for bankruptcy. The bankruptcy court ordered the airline to offer its employees two alternatives: to go back to work, or to receive a Termination package [severance pay]. This alternative was offered to Mr. De Shurley post-separation.

The pilots who chose the severance pay were required to purchase that option by: a) waiving the right to recall; and b) waiving the right to further claims against the company related to the strike. The post-Termination benefits were specifically computed on the number of years of past service, and nonetheless held to be separate property.
In finding these benefits to be Mr. DeShurley's separate property, the court distinguished Skaden and Horn by characterizing the severance pay as "compensation for the election to forego future employment with Continental Airlines". See DeShurley, at p. 995.

The DeShurley court stated that the post-Termination benefits were " not intended as a form of deferred compensation for services previously rendered, but rather represented present compensation for loss of his future earnings." The court also noted that were the pilot to have returned to work, his salary would have been his separate property.

The DeShurley court rejected the argument that the benefit was community because this constituted an absolute contract right [which it did], in that the pilot had a choice to return to work, and were he to have done so, he would not have received the severance pay. The DeShurley court also brushed aside the arguments that the post-Termination benefits were community because the pay was based on the number of pre-Separation service he had performed for Continental [which it was], the Termination was voluntary [which it was], and the silence in the record as to whether or not the pay was designed to ease John's transition back to the work force. None of this was deemed relevant: the only relevant factor was the purpose of the pay, which was to compensate for loss of future earnings.
This appears to be the case of the VERIP 3 benefits.

Disablility Cases

In that both lines of cases above analogize often to the disability cases, it is worth taking a look at those as well.

The acknowledged purpose of disability benefits is to compensate the disabled employee for his or her injury, including prospective loss of earnings and diminished earning capacity. See In re Marriage of Samuels (1979) 96 Cal.App.3d 122. The separate property character of disability benefits is not related to whether or not the right to the payments accrues after Separation, recognizing that in most of the disability line of cases, the injury giving rise to the compensation occurred prior to Separation.

The disability cases are also distinguishable from the Skaden line of reasoning in that even though disability rights might be pursuant to a contract right, the benefits are paid post-Termination because employment was no longer available to a disabled person.

The most recent disability case, In re Marriage of Elfmont (1994) 94 C.D.O.S. 1227, held that whether or not the disability policies were purchased pre-Separation, payments were subsequently made on them after Separation, and the post-Termination disability payments are separate property. This analysis is partly based on the fact that the payments clearly replace loss current income, but also on the nature of a disability policy itself, which basically provides protection against unemployment for a specified term, usually a year. Therefore, the purchase of the protection begins anew each year, regardless of when the policy itself was initiated.

The Elfmont court found that the community had received what it had bargained for from all pre-Separation payments on the policies: protection during the marriage against loss of income due to disability. Therefore, the payments after Separation purchased post-Separation protection against disability loss-of-income. Disability payments, then, replace lost post-Separation income, not benefits earned or arising absolutely by contract due to the purchase of the policies during marriage.

Verip 3 enhancement - particularily if offered post-separation - is separate property

Nature of VERIP

The Univeristy of California Voluntary Early Retirement Incentive Program consists of Transition assistance (calculated by multiplying the employee's January 1993 monthly salary by three); and Enhancements to monthly retirement income.

The University of California retirement plan monthly benefit formula for standard retirement is:

monthly benefit = [average monthly pay times age factor times service credit] minus UCRS offset.

Under VERIP 3, three years were added to the employee's age and three years to the employee's years of employment across the board - regardless of prior service or age. This addition increased both the age factor and the service credit terms in the above formula.
Purpose of verip: to replace lost current income

The purpose of VERIP 3 benefits is described in the brochure which announced the offering [in bold type]:

VERIP 3 is not an earned, vested or accrued retirement benefit. It is a special workforce-reduction program being offered to mitigate the impact of significant federal funding reallocations and cutbacks while maintaining the integrity of the scientific expertise necessary for the safe and responsible operation of each location.

Further, the purpose of Transition Assistance is described:
To help ease the transition into what may be an unanticipated retirement, UCRP is providing a one-time cash payment if you elect VERIP 3.

These benefits are intended to replace lost future income, analogous to separate property severance pay and disability pay.

VERIP 3 CLOSELY RESEMBLES DESHURLEY BENEFITS
! In both cases, the intent of the grantor company is to replace lost present and future earnings.
The DeShurley court made a finding that the Continental benefits were "present compensation for loss of future earnings". The UC system states that "VERIP 3 is not an earned, vested or accrued retirement benefit [;i]t is a special workforce-reduction program to help ease the transition into what may be an unanticipated retirement". ! Analogous to both disability rights and the separate property line of cases: The employee is required to waive substantial post-Separation rights [for de Shurley, the rights to future claims and to work in the future for the airline; for UC, the right to work in the future for the University in any position requiring memberships in the University of California Retirement Plan and the right to receive unemployment insurance or benefits]
! Both companies offered employees a choice between two alternatives: to continue working, or to accept an early retirement package;
! In both cases, if the employee returned to work he would NOT receive the package;
! In both cases, Termination is voluntary;
! In De Shurley the record was silent as to an intent to "ease transition", while here that intent is clearly stated.
Having done this analysis, we recognize that this issue is far from resolution and would welcome your counter legal anaylsis in support of the "MSA"


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