We might be in the twenty first century, but the traditional roles of “homemaker” and “breadwinner” still exist in some relationships. That decision as to how couples structure their roles within a relationship can lead to significant consequences upon separation. This is particularly so if one party has taken time out of the workforce to do the lion’s share of domestic duties, raise the children, and/or support the other party’s career, whilst the other party has stayed in the workforce to provide for the family. In some cases, the effect of that division of functions within the relationship can lead to what’s called “economic disparity”.

What is economic disparity?

Economic disparity is the situation that arises when parties separate and one party leaves the relationship in a better financial position than the other party due to the division of functions within the relationship. This situation will ordinarily arise where parties have structured their relationship in the traditional sense with one party being the “homemaker” (taking care of the children and/or domestic duties) while the other party is the “breadwinner” (providing income for the family). In this type of scenario, the homemaker has taken time out of the workforce, while the breadwinner has continued to build up their career during the relationship creating a significant disparity between the couple’s respective earning potentials at separation.

Why do we care?

In New Zealand, the founding principles underpinning the division of property upon separation include: that all forms of contribution to the relationship (both financial and non-financial) are to be treated equally; and that a just division of relationship property must have regard to the economic advantages or disadvantages to the partners arising from the relationship or separation. In light of this, the Property (Relationships) Act 1976 (“the Act”) has a specific provision (section 15) which allows a party to seek compensation from the higher earning party to redress the disparity.

Who can apply for compensation?

Under section 15 of the Act, a claim is usually raised by the party who has been disadvantaged by the division of functions within the relationship. This is usually the party who has taken time out of the work force and put their career trajectory on hold while caring for the children and/or taking primary responsibility for the domestic duties of the relationship. Upon separation, this party may find themselves with a significantly lower earning potential and/or encounter difficulty re-entering the workforce, whilst the breadwinning party reaps the financial benefits of a career that has continued to grow and develop during the relationship.

When is economic disparity assessed?

It is assessed as at the date of separation.

How is economic disparity valued?

Valuing an economic disparity claim and be complex, timely, and somewhat costly. Where a settlement figure cannot be agreed on between the parties themselves, often expert evidence from an actuary will be required to look into the parties’ potential future incomes and/or lost opportunities.

Furthermore, the Courts have established three different methods to use when calculating the value of an economic disparity claim:

1. Enhancement method: This method requires an enquiry into how much the homemaker has enhanced the income and career of the breadwinner by taking responsibility for most of the domestic duties in the relationship.
2. Diminution method: This method compares the difference between what the homemaker would have earned after separation if they hadn’t sacrificed their career, with what they are projected to earn now that they have taken time out of the workforce.
3. Disparity method: This method is prescriptive and compares the likely annual income of both partners. It then multiplies that difference by the number of years that the disparity will likely continue for, then applies a discount to reflect life’s contingencies. Finally, the figure is halved to ensure the partners are sharing the disparity equally.

Whilst the disparity method is the most common (and practical), it will depend on the facts of each case as to which valuation method is most appropriate.

Need help?

If you’re confused about what, why, when, how, and who regarding economic disparity claims, you’re not alone. This is a complex area of relationship property law that requires expert advice from qualified lawyers and actuaries. It doesn’t always have to end up in Court though, and often parties can, with the assistance of experienced lawyers, negotiate a reasonable settlement.

If you’d like to talk through whether economic disparity may be a consideration following your separation, please contact our Family Law team by filling out the form below to set up an appointment or contact Natalie Miller at natalie.miller@smithpartners.co.nz or phone  09 837 6843 today.