Blog

What is Economic Disparity?

If you are about to sign a Contracting Out Agreement (pre-nup) then I recommend carefully reading it to see if it mentions anything about economic disparity.  If it does, it is very likely that it is a clause saying that neither you nor your partner will bring a claim for economic disparity should your relationship end.  I recommend asking your Relationship Property Lawyer more about this and whether it is appropriate in your circumstances.  I will give a brief explanation of what economic disparity is (just so that you can have an idea) and your rights under relationship property law in New Zealand but this is only to give you an idea.  This is not legal advice and I strongly recommend talking to your lawyer more about this before signing the pre-nup because you could be disadvantaged (depending on your circumstances) should your relationship end in the future. 

Under section 15 of the Property (Relationships) Act (“the Act”), a court can make a lump sum award or transfer property to one partner if the court is satisfied:

1. The likely earning capacity and standard of living is significantly different between the two; and

2. The cause of the difference is a result of division of functions within the relationship.

For example, the husband stays home to take care of the children while the wife goes to work (division of functions).  By doing this the husband’s career is put on hold while the wife’s career has taken off.  Now after many years, the wife is in a much better financial position than the husband at no fault of the husband.  The husband has sacrificed his career for the family but is now disadvantaged when the relationship ends.  When that happens, the court can compensate the husband for this disadvantage.   

In deciding whether to make such an order, the court will have regard to:

1. The likely earning capacity of each partner;

2. The responsibility of each partner for the ongoing daily care of any dependent children of the relationship; and

3. Any other relevant circumstances.

This is to compensate for the different earning capacities of the partners caused by division of functions within the relationship.  In Scott v Williams [2017] NZSC 185, the Supreme Court held that s 15’s causation requirement seems to me to be a broad one, in the sense that where a relationship has been conducted along traditional lines and there is a disparity of income and living standards post-separation, it should generally be assumed that the division of responsibilities in the relationship:

“(a) was for the benefit of both parties (i.e. both of you benefitted from the arrangement);

“(b) restricted the non-career partner’s income-earning ability (i.e. the one who stayed home has had their ability to earn income restricted by staying home); and

“(c) enhanced the career partner’s earning ability (i.e. by being able to continue working, they have increased their ability to earn income).

Although, there is a presumption of economic disparity where one partner has stayed home to take care of children and the other has continued working, courts will be reluctant to grant an award if there is no evidence to establish that the enhanced income is a result of the division of functions within the relationship.  The one bringing an economic disparity claim needs to provide evidence that their earning capacity either remained the same or decreased due to being a stay-at-home parent while the ex-partner’s increased by being able to continue with their career.  Where the higher earning partner’s earning capacity reflects his/her qualifications, experience and abilities, causation is not established. But if the division of functions permitted the higher earning partner to apply him/herself to an extra degree, then causation for income enhancement will be made out.

Scott v Williams [2017] NZSC 185: “[287] Section 15 is not a rules-based provision, but rather it gives a broad discretion, with little guidance as to how it is to be exercised…Moreover, both parties to a relationship must be left in a position that allows them to move on with their lives. As a result, the amount of compensation that can be awarded will often be comparatively modest.  This case is the leading case in New Zealand on the topic because it is in the highest court in New Zealand so we listen to this case carefully.  Basically, the court is saying that there is little guidance in the Act on how to exercise an award for economic disparity but compensation should be an amount that leaves both in a position to be able to move meaning compensation should be modest.  In that same case, the court held that an award must be just and cannot create an injustice for the higher earning party.

Case law in New Zealand shows that there is no one method, formula or approach that can be applied to calculate an economic disparity order because there is no single way to prescribe what is just. This will depend on the individual circumstances of each relationship and each partner.  However, generally speaking courts will look at the following to determine an amount to award:

• The difference between the two partners’ earning capacity after tax;

• The number of years it would take for the lower earning partner to gain parity with the higher earning partner; and

• Contingencies such as the higher earning partner being made redundant or becoming too sick to work.

In B v B [2004] NZFLR 653 an approximate $8,000 difference in yearly income was enough to satisfy the test. Upon division of the relationship property both partners had enough capital to purchase a home, both provided equal childcare, but the husband earned $45,000 and the wife earned $37,000. The amount the wife could earn was likely to increase to a point where it would be equivalent to the husband. The wife was awarded a lump sum payment of $16,000.

In C v C, the wife provided evidence that the husband’s post-separation income was $200,000 per annum while hers was $15,000 in the year after separation.  The wife showed that she had previously earned $50,000 per year prior to the birth of her first child.  At the time of the court hearing, she was earning $72,000 per year.  The court determined that it would likely take the wife 6 years to regain the parity she would have had but for the decision to take care of the children.  The wife was awarded $50,000.

If you are about to sign a Contracting Out Agreement and it has a clause regarding economic disparity, ask your lawyer if this is appropriate in your circumstances.  If you are a stay at home parent putting your career on hold while your partner’s career is taking off, and the pre-nup states that you will not bring a claim for economic disparity, it may not be recommended to sign such a pre-nup.  It may be recommend to remove this clause because you could be very disadvantaged should your relationship end.