Many clients ask, “My spouse has a commission only job, or the majority of their income is from commissions, how do I calculate support, since there is never really a regular number?” There is a case that is used by family law courts in spousal support cases, where one spouse has significant bonuses or commissions as part of their income, which is a case called Marriage of Ostler and Smith.
What Exactly is Ostler and Smith?
The court interpreted the term annual bonus, as used in additional support provision of an order for support, to include discretionary performance-based payments and additional compensation above the base salary. One of the issues is that commissions may be nonexistent in one month and higher in the next month. Attempting to annualize this number that is paid on a monthly basis, may be based on speculation that a spouse will receive bonuses or commissions.
The supporting spouse may be at a disadvantage in some months, and there may be a windfall to the supported spouse. In the event that the supporting spouse does not have a bonus the support may be 100% of the pay for that month.
What Factors Does the Court Specifically Use in This Situation
The courts want to look at the equity of the situation. Therefore the Courts have set forth a method where the supporting spouse pays a percentage of that income, known as an Ostler/Smith or Smith/Ostler bonus income for additional support. When using this method, the base support is geared towards the actual predictable cash flow that is available for support. The supported spouse shares proportionally in the unpredictable income, such as the commissions and bonuses. When using a Smith/Ostler formula for support, it is common to adapt a maximum number to be assigned to the bonus income, so that it is commensurate with the lifestyle and the marriage. There are many jobs that require mandatory overtime pay, as part of the regular compensation package, and it is used to determine the family budget. Overtime is not guaranteed and it fluctuates on a month to month or even weekly basis, therefore the Ostler/Smith formula may also be used for Overtime.
We had a case where our client received a nominal base pay and the majority of his compensation was through commissions. These commissions were often paid out several months after to allow for the return of any sales, which may be deducted from future commissions. In the year prior to the divorce, he had an exceptional year and his spouse was trying to use the taxes to receive support based on a monthly income calculation with his income annualized. We argued that since his income was inconsistent, we should not use the income on the tax returns, but instead should base the award on his base pay, for the monthly support amount. Next, we would use a percentage of his commissions and pay those out on a regular basis to the supported spouse.
Fortunately, the court agreed with our position, and rather than having a flat, fixed monthly burden in months where he was not earning commissions, support was paid out over time and based on the actual income he was receiving.
If you have any questions about bonus income and spousal support, shoot us over an email or give us a call.