Who gets the severance package in the divorce?

When poverty flies in the window, love flies out the door. In this climate of layoffs and job losses, marriages are under added stress. Do severance packages become part of the divorce?

These consist of benefits an employee obtains after termination. Severance packages include salary, payments based on months of service, payment for unused vacation time or sick leave, medical, dental, or life insurance, retirement benefits, stock options, or job search assistance. Severance packages are usually a salary substitute for a worker while that worker looks for a new job.

The leading case in Colorado addressing severance packages is In re Marriage of Holmes, 841 P.2d 388 (Colo. App. 1992). In that case, Husband was employed by Public Service Company. Two years before the divorce, his employer informed employees that the nuclear plant was to be decommissioned, and the employees released in phases.

The employer offered a plan to workers to complete the nuclear operations. An employee could either “(1) secure a transfer to another position within the company and receive no severance or additional benefits; (2) choose a career continuation plan and receive an additional 90 days continued salary, career counseling, and benefits, and if unable to transfer to another position in the company within such 90 days, receive a reduced lump-sum payment based on length of service plus three months of continued health insurance; or (3) terminate employment after expiration of the 90-day notification period and be entitled to one year’s salary plus a benefit supplement to obtain continued health insurance coverage.”

The court found that the Husband’s severance pay was not part of his normal salary and benefit program, but existed to replace the expected loss of income after termination even though the severance plan was offered as an incentive to employees to remain in their positions until the plant closed. Even though the benefits received in the severance package were determined in part by the length of time in which an employee worked at the plant, the severance package was contingent on the future event of termination. The severance package was therefore not a marital asset to be claimed by the spouse.

What about workers’ compensation benefits? Severance packages indemnify employees who have been laid off or lost their job, and worker’s compensation benefits indemnify an employee for loss of earnings, future diminished earning capacity, and medical expenses arising out of an occupational injury or disease. In re Marriage of Smith, 817 P.2d 641, 644 (Colo. App. 1991). If a workers’ compensation award compensates a spouse for the loss of earning capacity after the dissolution of the marriage, it is not marital property. On the other hand, a workers’ compensation award can be deemed marital property to the extent that it compensates for lost marital wages, or for medical care or other related expenses incurred during the marriage.

In contrast, where a Husband received special separation benefits (SSB) upon his voluntary discharge from the Air Force, and the payment was provided as a contingency payment for officers who were career committed, but to whom a full military career might be denied, SSB payments were deemed to be a deferred compensation plan rather than a severance payment. In re Marriage of McElroy, 905 P.2d 1016, 1020-21 (Colo. App. 1995).

When severance packages compensate for post-dissolution loss of earning capacity, they are not marital property. When they are a form of deferred compensation for services performed during the marriage, they are deemed marital property subject to equitable division by the court.
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