After more than 20 years practicing assisted reproductive technology (ART) law and 13 years co-owning an escrow company, one of the most common problems I have encountered involves the payment of lost wages. Problems most typically arise from how lost wages are calculated. The purpose of this article is to enable you to proactively address calculating lost wages to help avoid having issues arise later. It is never pleasant when a gestational surrogate (GS) is put on bed rest and the escrow company has to come back to counsel to seek clarification. Even worse is when the lost wages are not in an amount that either party expected would be paid.
There are two fundamental issues that need to be addressed when drafting a lost wage provision in a Gestational Surrogacy Agreement (GSA). The first is whether reimbursement for lost wages will be paid at a gross or net hourly rate. If the matching program does not have a policy on point or you are working on an independent match, you need to make this determination. The second issue arises from problems calculating the rate when the GS does not have a standard paystub. Let us break these issues down.
If you are drafting for payment of gross lost wages and the GS has a straightforward paystub, you can usually find the gross hourly rate on the paystub itself. It might be useful to consider whether to stipulate that rate to be paid throughout the duration of the surrogacy journey or whether the GS should provide paystubs at the time lost wages are incurred to obtain a current rate, and address what happens if she obtains new employment with higher wages. One advantage of stipulating an hourly rate is that it helps the parties have an expectation of what will be paid and avoids unpleasant surprises. The same can be said for addressing any potential wage increase by placing a cap on the amount of any increase.
Unless the matching program has a set calculation for net lost wages, there is no correct way to calculate net lost wages except that to which the parties agree. Typically, net lost wages are the amount of money an employee takes home after all deductions are subtracted from gross pay. Deductions can, but do not have to include federal, state, local taxes, social security, Medicare, retirement contributions, health insurance premiums, and any other withholdings. Consider what the GS would have earned, minus taxes and/or deductions, as well as any income received from other sources (i.e., disability). The crux of this calculation is how you determine the amount of income being taxed. Net lost wages can be defined as:
gross lost wages less federal, state, and local taxes and any other mandatory federal and state withholding;
gross lost wages less deductions that are not taxable (i.e., retirement contributions or health insurance premium);
gross lost wages minus a specific percentage to reflect a tax rate (this is helpful if you want to exclude commissions, bonuses, and shift differentials); and
actual take home pay.
One suggestion, try backing-out the rate using the GS’s paystub before you finish drafting. It may turn out to be more difficult than you expected to obtain your net calculation and you may need to go back to the proverbial drafting board.
Paystubs or wage documentation is critical to your calculation of lost wages and your GS may not have straightforward pay documentation. She may be a nurse with shift differentials and overtime, a salaried teacher who does not get paid during the summer months but her wages are calculated on an annual basis, or she might receive tips, bonuses or commissions.
First, it is important to note that when a GS has paystubs reflecting variable rates of income you need to be specific regarding the documentation needed to obtain the calculation, especially if she is going to receive net lost wages. Consider how many paystubs should be provided to escrow to get a reliable estimate when a GS is a nurse with shift differentials and overtime pay. Alternatively, a GS may receive income from tips which are paid in cash and form the larger part of her income but are not reflected in her paycheck. A self-employed GS might only be able to provide documentation of Venmo payments. Another GS might receive bonuses or commissions that vary month-to-month or year-to-year. It may be next to impossible to calculate an accurate net rate if her income is variable and/or based on cash payments. One option is to base a net calculation on her prior year’s tax return. But consider that she may not be disclosing all of her cash income so the rate on her tax return is artificial, or her prior year’s bonus/commission is not guaranteed for the current year and thus impacts her tax rate. This can become extremely complicated and speculative. Oftentimes when dealing with variable income or that without typical wage documentation it is best to reimburse the average gross hourly rate based on a prior sampling of her income immediately preceding the date of lost wages. In this case you need to determine both the type and amount of documentation to be provided to calculate a current average gross rate.
And beware the GS who is a teacher, as she will have an employment contract that provides a daily rate of pay which is (usually) multiplied by the number of school days covered by the contract. Problems arise when her paystubs do not reflect this contractual rate. This is common when the GS is paid over 12 months but the contractual rate is based on the shorter school year. Here you need to consider whether to stipulate to pay her contractual daily rate as gross lost wages only during the school year. If she is paid over 12 months, you can use her paystubs to calculate a gross or net rate; the problem here is that she may argue that she should be paid her contractual daily rate (which is higher because it is based on the number of days in the school year). You need to be very clear how the calculation is being reached in light of any discrepancies that may exist between a teacher’s rate of pay as reflected in her employment contract and her paystubs.
As you can see, the calculation of lost wages present a myriad of issues that counsel must consider when drafting a GSA. Taking the time during contract negotiations to address these issues will save everyone time and aggravation when lost wages need to be paid during the surrogacy journey.
