Divorce. Sadly, it happens every day. Fortunately, there are laws in place to help make things as fair as possible for a couple that is splitting up. That means that even the division of property is governed by laws. But what about lawsuit earnings? In particular, employment lawsuit earnings? How are they treated in a divorce?

When earnings from an employment case are involved in a divorce, things might get a little confusing. It’s best to understand what lawsuit earnings are and how the law is when it comes to asset division. Since each state in this great nation has different marital property laws, this article should only be used as a learning device to educate yourself to ask your own professional the right questions.

Basics of Employment Lawsuit Earnings

In short, most earnings in a judgement or settlement from an employment lawsuit are considered income. This means that you must report employment lawsuit earnings when you file your taxes. This is different from earnings received from a personal injury lawsuit, which, in most states, is not considered income and, generally, not taxable. So, as long as the funds from employment lawsuits are not for personal injury-related or physical sickness reasons, it is taxable income. Types of earnings in a lawsuit may include the following:

• Lost wages (economic damages)
• Emotional distress damages (non-economic damages)
• Penalties
• Attorney’s fees
• Costs
• Punitive damages
• Interest on a damages award

Neither of us are tax lawyers, so you should absolutely consult with a tax professional if you are interested in the tax ramifications of a lawsuits settlement or verdict. The IRS has an entire section on its website dedicated to lawsuit earnings. We highly recommend that you read it.

How Are Assets and Property Divided in a Divorce?

This is a complicated question to answer. First of all, it depends on the law in the state where you reside. California, for example, is a community property state which makes all property and assets gained during a marriage, equally owned by both parties (with few exceptions). Illinois, on the other hand, is an equitable distribution state, which means that marital property is not-necessarily divided equally, the judge tries to divide it fairly based on the couple’s circumstances.

When a couple divorces in most states, they have the option to decide how to divide everything on their own in a dissolution agreement. This is the preferred method of many family courts and judges, but it’s not always possible. When couples can’t amicably decide on the division of assets, judges use their respective state’s family laws to make the decisions for the couple. Each state has its own laws that apply and the laws vary so it is necessary to consult with an attorney from your state.

Let’s first look at a community property state. California recognizes community and separate property in a marriage. Community property is any property or asset that a married couple gains while they are married, with the exception of inheritances. That means that each spouse will receive half of the property if they split up in a divorce or legal separation. Separate property, on the other hand, is recognized in California as property that an individual owns before or after they enter into a marriage. Basically, what you own before you get married is yours alone and what you get after a divorce is yours alone. Separate property remains separate even when you become married, as long as you do not commingle it with community property (i.e. Putting your separate money into a shared bank savings account). When the couple separates, the Judge attempts to divide the community property 50/50, and ensure that each person’s separate property stays separate.

Now let’s look at an equitable distribution state. Illinois holds that money or property acquired during the marriage is presumed to belong to the marriage. Upon divorce, all the marital property is subject to an equitable division. What is “equitable” is decided on a case-by-case basis. The Court may award more to the wife, or more to the husband, depending on what is fair considering that couple’s circumstances.

In every state there are exceptions to these general rules because every situation is different and not everything is clear-cut. Again, it bears repeating that every state is different so you must investigate how your state treats marital property to make sure you are getting accurate advice.

Dividing Employment Lawsuit Earnings

Now, let’s put the two things together. When a couple separates and there are earnings from an employment lawsuit for one spouse, is the money split evenly between spouses? Since the earnings from an employment lawsuit is to be counted as taxable income, that means that the money is community property or marital property. So yes, the earnings will be split between the two spouses in the divorce settlement.

One major exception is in regards to whether the damages paid in the employment lawsuit was for pain and suffering. In this case, the money is not split and will remain the injured spouse’s separate property. The pain and suffering only refers to physical injury or physical sickness due to work-related things. Emotional distress is not considered a physical injury or sickness, nor is the physical ailments that come from emotional distress, such as stomach pains, headaches, indigestion, etc.

What About Ongoing Lawsuits?

What if you file an employment lawsuit in January, get separated from your spouse in March, and then your case settles in December? Do you get to keep all the money to yourself? The answer is probably no; the money will be split up like any other asset. Following your termination, if you were out of work for two months and then got divorced, and were out of work for an additional eight months, you and your spouse will probably be splitting up 20% of the settlement.

Can You Protect Lawsuit Earnings?

It’s fair game to have your lawsuit funds split when you’re still married and the lawsuit is pending or has been settled. Your soon-to-be ex-spouse will receive half of the settlement/award in the divorce. However, there are a few things that can be done to protect your employment lawsuit earnings:

1. Have a legal separation agreement in place if you anticipate a divorce after your lawsuit has begun.
2. Have a postnuptial or prenuptial agreement in place, with the lawsuit earnings distinguished as personal versus marital.
3. If the employment lawsuit is because of a physical injury, be sure that your employment attorney designates it as so in the settlement agreement, because lawsuit earnings from personal injury is considered separate property in a marriage (with few exceptions).
4. Do not commingle separate lawsuit earnings (from before getting married) with community property. Keep a separate bank account from the marital bank account.

It’s not guaranteed, but if you hire a tax lawyer or professional for your case, it’s likely that they’ll be able to help you figure out division of assets that you’re comfortable with. It’s difficult to prove that the earnings should be separate property. Though the law tries to make things as fair as possible for a divorcing couple, it doesn’t always work for every situation. It’s good to know as much as you can about lawsuit earnings and divorce, but working with knowledgeable and experienced lawyers will definitely work in your favor in court. If you’re going through a divorce right now or anticipate one coming, and are concerned about losing lawsuit earnings that should be rightfully yours, reach out to a family lawyer as soon as possible.

About the Authors

Jason Smith is a family lawyer in Irvine, CA. He attended Pepperdine University School of Law. He recently opened his own family law firm after working for several years as a litigator. His office handles all family law related matters, including divorce and the division of marital assets. Visit his website here to learn more information.

Robert Odell is an employment lawyer in Los Angeles, CA. Mr. Odell attended Chapman University School of Law. He started exclusively practicing employment law in 2012. With several trial successes under his belt, his office handles harassment and wrongful termination lawsuits against large corporations. Visit his website here to learn more information.