Legal Blog

Could Your Employees’ Perks Count As Wages?

benefits defintionIn the process of representing a spouse in a divorce case, a family law attorney will typically discover information about either partner’s employer’s accounting practices. These details can have a dramatic impact on divorce proceedings. In fact, poorly-defined wages can cost employees dearly, or create a windfall for a non-financially dominant spouse. Company owners face amplified risk. In a divorce case, ownership in a business is a highly valuable asset. States such as Maryland define the value of the company as the organization’s fair market value—that is, an arm’s length transaction between a willing seller and buyer—so if you own 15 or 20% of a company, a judge will assess you as having that amount of money in your bank account. Management and human resources professionals can learn a great deal about their organizations’ blind spots from a divorce, alimony, or child custody suit. Issues such as tax liabilities, misreported income, or simply underdeveloped compensation structures can all come to light, exposing the vulnerability of an executive or employee’s financial standing. In this three-part series, I will take a look at the intersection of two practices areas: family law and employment law, and how the two overlap in unexpected ways.

Why Should Employers Be Aware of Family Law Issues?

As mentioned above, how companies pay their employees or how business owners elect to be paid can influence a family law case. The ways attorneys use this information depend on the perspectives of their clients. A divorce lawyer representing an employee wants to minimize the employee’s earnings. An attorney representing that employee’s spouse, on the other hand, would want to maximize those earnings. In a family law case, a person’s income is somewhat of an amorphous concept. Wages are almost never the only form of earnings. Maryland law considers gross income, meaning income from any source, in the calculation of child support, alimony, division of property, legal fees, and more. That means the so-called “perks” an employee receives can make a tremendous difference in the financial outcome of a family dispute. Besides potentially putting its employees in financial jeopardy, a business could be unwittingly engaging in tax fraud by not accounting for less obvious forms of payment. While we will be touching on some of these concerns throughout this series, be aware that none of the guidance herein should be considered tax advice.

What Are Some Employment “Perks”?

Along with salary and wages, there are a number of categories a court may define as an individual’s income: commissions, bonuses, dividends, Social Security benefits, workers’ compensation the list goes on. Add to that range any or all of the following perks, and the risks become more apparent:

  • Medical, dental, and other insurance. Many companies will subsidize a large portion of an employee’s insurance benefits. Depending on the amount of the subsidy, a lawyer may argue their opponent’s employer is paying higher than the market value, and that the amount covered should be included as part of the employee’s wages. If most companies pay 50% of their workforce’s health insurance, for instance, a company paying 100% could cost its employees heavily in court.
  • Use of a company credit card. Even when employers believe they do not allow their workforce to incur personal expenses on company credit, they frequently do not monitor minor expenditures or check to make sure business and personal uses remain segregated. Doing so is time- and resource-intensive, and a trip to the supermarket or dinner out may go unquestioned if it appears to be a business expense. An attorney advocating for an employee’s spouse will subpoena the employee’s company credit card and look for anything that could be characterized as a personal expense. Any uncertainty regarding reimbursement could spell financial trouble for the employee—as well as the employer.
  • Reimbursement for internet and cell phone use. Employees who work from home often submit the entirety of their home office expenses—computer, phone, internet, printer, ink, and so on—for reimbursement. During a deposition, if an attorney learns that an employee sometimes uses equipment covered by the company for non-work purposes, those expenses could be considered part of the employee’s wages.This could also be a problem from the employer’s standpoint. While countless de minimis costs go unscrutinized, organizations only lose money when they ignore employees’ and leadership’s personal expenditures made with company funds.

Other perks include company cars, gas cards, travel expenses, meals and lodging, gift cards, cash bonuses, prizes and holiday gifts, and many more. Employees, particularly those in high-ranking positions, regularly make liberal use of these perks without assessing the potential pitfalls of domestic legal proceedings—or for that matter, an internal or external audit. Companies should consider whether each optional benefit given to employees is worth its possible expense and stands up to thorough legal and regulatory scrutiny. Keep in mind that family attorneys will scour all available financial information to obtain any advantages for their clients. There are a few other reasons to prioritize these issues:

  • An employee enduring a divorce trial would be very unhappy to learn that, despite her W-2 listing her income as $100,000 per year, she technically makes more due to the benefits listed above. The employee could end up paying alimony or child support based on the higher number—as much as $10,000 or $20,000 more than she would otherwise.
  • Company liability. Every company has a responsibility to accurately report its workforce’s earnings to the IRS. When the magnified lens of a divorce case exposes a company’s sloppy or improper accounting practices, the business faces enormous risk from regulatory agencies and shareholders alike.
  • Company losses. Poor accounting foments material loss as well as liability. Later on in this series, we will look at instances where mismanaged finances actually produced an environment where low-level employees embezzled company funds over a long period of time.

 

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