A client’s professional association compensated all of the owners through a combination of fixed salary and bonuses. The firm made no profit distributions. Bonuses were distributed quarterly by vote of the partners, and amounts were based upon available cash flow. The client asked if all the compensation is exempt as wages if the client is head of household.
Money received by a debtor who is one of several owners of a business may be characterized as wages for purpose of the head of household exemption. The statute also specifically exempts bonuses. However, in this case, the firm is making monthly distributions of almost all net income, and the amount of monthly distributions is based primarily on the firm’s profits for the month. When bonus payments are based upon firm profit and cash flow rather than issued occasionally to award an employee’s performance I suspect a court would not exempt the bonus as part of wages paid to a head of household.
The wage exemption protects compensation for the debtor’s labor and not the profitability of a debtor’s business. Courts should look beyond labels applied to cash distributions to see if the payments truly are in the nature of employee compensation and rewards.
Post updated on