It is not unusual to use a three or five year average of someones income when calculating alimony and/or child support if their income fluctuates. Why does income fluctuate? Sometimes people earn commissions based upon sales which vary from year to year. Sometimes the economy or other reasons dictate how much of a bonus they get. Some times deferred compensation, when it vests and/or is cashed in, yields more in some years than in others. There are many reasons why income can fluctuate. As such, both the case law and child support guidelines advise that we should use an average when calculating support.
That said, is this always fair? What do you do in cases where it is clear that the prior income wont be repeated? That was the issue in the case of Harwelik v. Harwelik, an unreported Appellate Division opinion decided on December 19, 2011. In this case, the husband’s average income was about $300,000. However, this included both short term bonuses that he was able to defer and long term bonuses that had a 3 year vesting period. In July 2006, when the husband’s employer, Verizon, sold most of its international assets, his title was downgraded from director to manager. As a result of the change, he was no longer eligible to receive long-term bonuses, although the bonuses previously
granted would still vest and be fully payable. In addition, as a manager, plaintiff could no longer defer the short-term bonuses he received after 2006. When excluding this deferred compensation from the average income, it was substantially less. That said, the trial court used the $300,000 average.
In a confusing opinion, the Appellate Division affirmed the use of an average but reversed the use of the $300,000 number because it included the deferred compensation that the husband no longer had, through no fault of his own.
The court’s decision was confusing because of the following paragraph included in the opinion:
Plaintiff also claims the court erred in failing to average his income for purposes of determining alimony. We do not agree. In Platt v. Platt, 384 N.J. Super. 418, 422 (App. Div. 2006), the plaintiff controlled a business and "determined the salary he would be paid each year." In that case, we found it was reasonable for the trial court to average plaintiff’s income over a five-year period, including the two most recent years after the divorce complaint was filed, because he "chose to drastically reduce" his income even though his business was "doing well financially." Id. at 426-27. In this case, however, there was no claim that plaintiff manipulated his income, and we perceive no abuse of discretion by the trial court.
Despite finding no abuse of discretion by the trial court, the Appellate Division then held:
However, we have also concluded the trial court must reconsider the amount of the
award because it was based on an income of $300,000, which included a substantial long-term bonus that plaintiff no longer receives. We therefore remand this issue and that of plaintiff’s child support obligations to the trial court for further proofs and reconsideration.
The takeaway from this case is that while it is appropriate to use income averaging, it should not be blindly done. If the sources of income or method of compensation change such that it using income averaging would be unfair because the income cannot continue, then must be consideration of this too. Though not the facts in this case, this should probably work in both directions too. For instance, if using an average would not be fair because it is clear that the future income is going to be much higher, then perhaps the higher income should be considered. The bottom line is that before simple averaging is used, if the facts are not "simple", then there should be critical analysis done.
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Eric Solotoff is the editor of the New Jersey Family Legal Blog and the Co-Chair of the Family Law Practice Group of Fox Rothschild LLP. Certified by the Supreme Court of New Jersey as a Matrimonial Lawyer and a Fellow of the American Academy of Matrimonial Attorneys, Eric practices in Fox Rothschild’s Roseland, New Jersey office though he practices throughout New Jersey. You can reach Eric at (973)994-7501, or esolotoff@foxrothschild.com.