How Severance Pay Affects Spousal and Child Support

When a spouse is ordered to pay support after a divorce, the calculation is often straightforward if the payor has a predictable salary. However, when income is variable, such as commissions, bonuses, or severance packages, courts must determine a fair method for calculating support. In California, case law provides clear guidance on how additional or non-traditional income should be handled; however, the outcome depends on the structure of the payment and the legal arguments presented in support of it.

Cases like In Re Marriage of Ostler & Smith and In Re Marriage of Tong & Samson illustrate how courts draw distinctions between income earned through work and income provided as a cushion during unemployment. Understanding these distinctions is critical for both payors and recipients of support.

Base Income and Additional Income in Support Calculations

California courts typically begin with the base income, which refers to the guaranteed wages or salary that a spouse consistently earns on a regular basis. This is the foundation for guideline child support calculations and spousal support awards.

However, many professionals receive more than just a paycheck. Commissions, sales bonuses, and performance-based incentives can vary dramatically from month to month. To account for this, courts often issue Ostler & Smith orders.

These orders require the paying spouse to contribute a percentage of additional or variable income beyond the base salary. For example, if a spouse earns $10,000 per month in base salary but also receives quarterly commissions, an Ostler & Smith order might require a percentage of those commissions to be paid as extra support. This ensures fairness and reflects the true financial picture of the supporting spouse.

This principle originates from In Re Marriage of Ostler & Smith (1990) 223 Cal.App. 3d 33 and was reaffirmed in In Re Marriage of Mosley (2008) 165 Cal.App. 4th 1375. Both cases emphasized that support should reflect both consistent income and additional earnings that impact a family’s financial resources.

The Core Question: Does Severance Pay Count as Income?

Severance packages differ from commissions or bonuses because they are typically not earned based on performance or productivity. Instead, they are offered when employment ends, often to soften the financial impact of job loss.

The key question is whether severance should be treated as “income” under a support order. If so, a recipient spouse may argue they are entitled to a percentage of it, just as they would be for bonuses or commissions. If not, severance is viewed more like a temporary cushion that should not dramatically alter support obligations.

Case Study: In Re Marriage of Tong & Samson (2011)

Facts of the Case

In In Re Marriage of Tong & Samson (2011) Cal.App. 4th No. B224899, the court faced this exact issue. Richard and Elaine divorced, and their judgment required Richard to pay:

• Approximately $9,000 per month in spousal support, plus
• 35% of any monthly compensation exceeding $25,000.

After his layoff, Richard received a severance package worth about $310,000. He argued that the severance should be treated as income spread across multiple months, while Elaine claimed she was entitled to 35% of the entire severance immediately as a lump sum.

Court’s Ruling

The appellate court sided with Richard, holding that the Ostler & Smith order did not apply to severance pay. Severance was not compensation for services performed but rather a financial bridge intended to cover 12 months of lost salary and 6 months of lost commissions. The court reasoned that treating severance as monthly income would distort the purpose of the support order.

This ruling clarified that severance is distinct from variable income, such as bonuses or commissions, and therefore is not automatically subject to percentage-based support calculations.

Why Severance Pay Is Treated Differently

California courts distinguish between different types of payments to avoid unfair results:

• Work-related earnings (salary, overtime, commissions, bonuses) are clearly income for support.
• Severance packages are tied to job termination, not active employment. They are designed to provide temporary relief, not as a reward for productivity.

By separating severance from variable income, courts prevent one spouse from receiving a windfall while the other spouse faces involuntary unemployment. This approach reflects the policy goals of fairness and balance under California family law.

California Family Code and Severance Pay

Statutory law also plays a role in these decisions:

• Family Code §4058: Defines “annual gross income” for child support. It includes income from virtually any source, but courts retain discretion when payments do not resemble ongoing earnings.
• Family Code §4320: Lists factors courts consider in spousal support, including earning capacity, ability to pay, and standard of living. Even if severance does not trigger an Ostler & Smith order, it may still affect whether and how long a spouse can pay support.

This statutory framework enables courts to tailor their rulings to the unique circumstances of each case.

Implications for Spousal Support

Severance payments may influence spousal support, but not in the same way as monthly bonuses. Courts are more likely to treat severance as part of the payor’s overall ability to pay under Family Code §4320, rather than applying a fixed percentage.

For instance, if a severance package is structured in installments, it may resemble wages, and courts could treat it differently from a one-time lump sum. The context of the payment is crucial.

Implications for Child Support

Child support is calculated using a mandatory guideline formula. Whether severance counts as income under that formula depends largely on structure:

• Lump sum payments are less likely to be treated as monthly income.
• Installment payments that resemble wages are more likely to be included as part of gross income under Family Code §4058.

In practice, this means child support can be more directly impacted by severance than spousal support, especially if payments are spread over time.

Procedural Guidance: What to Do If You’re Laid Off

If you lose your job and are under a support order, time is critical. Support obligations do not automatically adjust when your income changes.

1. File a Request for Modification: Courts require a formal motion showing a material change in circumstances. Until the order is changed, your existing obligations will remain in effect.
2. Provide Documentation: Submit pay stubs, severance agreements, and proof of layoff. These records show the nature of the severance and whether it should be considered income.
3. Account for Taxes: Severance is taxable like wages. Since support is calculated on net income, your tax burden can affect support levels.
4. Act Quickly: Courts cannot retroactively reduce support prior to the date of filing. Delays may lead to arrears with interest.

Conditional and Future Scenarios

• If severance runs out: Support obligations remain unless modified, even if you are unemployed.
• If you find a new job quickly, Courts may prioritize new income over severance when recalculating support.
• If severance is structured in installments, Payments may be treated like wages and included in support calculations.
• If the receiving spouse challenges, the court will analyze the structure and intent of the payment, often examining whether it replaces wages or rewards past work.

Frequently Asked Questions

Does severance count as income for spousal support in California?

Not under an Ostler & Smith order. However, courts may still consider severance under Family Code §4320 when evaluating the ability to pay.

Does severance count as income for child support?

It depends on how the severance is structured. Lump sums are less likely to count than installment payments, which resemble wages.

Can I modify my support order if I am laid off?

Yes. Job loss qualifies as a material change in circumstances, but you must file a formal request with the court.

What happens if severance runs out before I find a new job?

You remain responsible for support until the order is modified or updated. Courts cannot retroactively adjust obligations prior to your filing date.

How does taxation of severance affect support?

Since severance is taxed as wages, it reduces your net disposable income, which is the figure courts use for support calculations.

Get Legal Help from Reape Rickett

Support obligations during job loss and severance negotiations require careful handling. California law distinguishes between bonuses, commissions, and severance packages, but each case depends on the facts.

The attorneys at Reape Rickett have extensive experience navigating complex income issues in divorce, including severance packages, bonuses, stock options, and commissions. We help clients protect their rights, avoid arrears, and pursue modifications when circumstances change.

Contact Reape Rickett today to schedule a consultation and gain clarity on your obligations and options.