Can I Claim My Bonus in a Settlement Agreement?

The Difference Between Contractual and Discretionary Bonuses

Not all bonuses are the same in law. Understanding the distinction is crucial for your settlement:

Contractual Bonuses: These are bonuses your contract guarantees you'll receive on specified conditions. For example: "Employees receive an annual bonus equal to 10% of base salary, payable in December if performance targets are met." If you're entitled to a contractual bonus and the payment date hasn't passed, you should be able to claim it.

Discretionary Bonuses: These are bonuses the employer has discretion to award, without a contractual obligation. The contract might say: "Bonuses may be awarded at the Company's discretion up to 20% of salary." The employer has no obligation to pay, even if targets are met.

The key difference: if your bonus was contractual, you can claim it in your settlement (or push the employer to pay it). If it was discretionary, the employer can withhold it without breaching your contract, though you can still negotiate to have it included in the settlement.

Identifying Your Bonus Position

Before settlement negotiations, determine your bonus position:

Check Your Contract: Look for:

• Specific bonus percentage or amount
• Conditions for payment (performance targets, bonus pools, profitability)
• Bonus timing (when it's paid in relation to the performance period)
• Discretionary language ("may" vs "will")

Check Bonus History: How have bonuses been paid historically? If bonuses are described as "discretionary" in your contract but have been paid consistently every year, there's an argument they've become a contractual entitlement through custom and practice.

Check Your Employment Status: Are you still employed when the bonus should be paid? In some cases, employment ends before the bonus date. This affects whether the bonus is still owing.

Bonuses Owed to the Settlement Date

If a bonus was due to be paid before your settlement date, it should be included in the settlement unless it was already paid:

Example 1: Your contract specifies bonuses are paid quarterly in January, April, July, and October. It's March and you're settling. A bonus was due in January but not paid. You should claim this in your settlement.

Example 2: Bonuses are paid annually on 30 December. It's June and you're settling, with employment ending in August. The December bonus hasn't been paid, but it's not yet due. You can still claim it—the employer should either pay it on the usual date or pay it as part of the settlement now.

Any bonus that was contractually due should be claimed. If your employment will end before a future bonus payment date, negotiate to include the anticipated bonus in the settlement as compensation for the loss.

Discretionary Bonuses and Settlement Leverage

If your bonus was discretionary and not yet paid, you don't have a contractual right to it. However, this doesn't mean you can't negotiate to have it included:

Use as Negotiation Leverage: If you're settling a dispute with your employer, a discretionary bonus not yet paid is leverage. You can push for the employer to pay it as part of settlement, without a legal obligation to do so. For example:

"Our client was on track for a discretionary bonus of £15,000. Whilst the Company has discretion on bonuses, as part of this settlement, our client seeks payment of the anticipated bonus in recognition of contributions made."

Many employers will include discretionary bonuses in settlements to avoid dispute and reduce the risk of litigation.

Accrued Commission and Benefits

Beyond bonuses, other accrued financial entitlements should be claimed:

Commission: If you're entitled to commission on sales, any commission earned but not yet paid should be included in the settlement. Even if it's only paid quarterly, you should claim accrued commission to the settlement date.

Holiday Pay: You continue to accrue holiday throughout employment. You should be paid for:

• Holiday accrued to the settlement date that hasn't been taken
• Holiday you would have accrued during any notice period

Shift Allowances or Premiums: If you receive regular allowances (shift premiums, unsociable hours allowance, etc.), these should continue to be paid through the settlement and notice period.

Expenses Outstanding: If you've incurred expenses that should be reimbursed (travel, equipment, professional fees), these should be resolved as part of settlement.

Making Clear Claims in Your Settlement

When negotiating your settlement, be specific about financial claims:

Document Everything: Provide your solicitor with:

• A copy of your employment contract showing bonus terms
• Previous bonus slips showing historical payments
• Email correspondence about bonuses or expectations
• Commission statements or sales records showing accrued amounts
• Holiday records showing accrued and unused holiday

Quantify Your Claims: Don't make vague claims. Be specific:

• "Q1 bonus of £5,000 due January (not paid)"
• "Accrued commission of £3,200 as at settlement date"
• "8 days accrued but unused holiday at £200/day = £1,600"

Justify Discretionary Claims: For discretionary items, explain why they should be included:

• Historical practice (if bonuses are always paid, they're effectively contractual)
• Fairness (if you've worked toward targets but leave before payment)
• Negotiation (if this resolves a dispute without tribunal)

Settlement Structuring for Tax Efficiency

How different financial elements are paid affects your tax liability:

Accrued Wages (Bonus, Commission, Holiday): These are taxable at full rate as employment income. No tax saving here.

Damages for Loss of Bonus/Benefits: If you're settling a claim that includes damages for lost future bonuses, these might be characterised as damages rather than wages, with potential tax advantages.

Example: Instead of agreeing "we'll pay your unpaid bonus of £5,000," negotiate: "We'll pay £5,000 as compensation for expected but not-yet-earned bonus." The characterisation might matter for tax purposes. Get tax advice on how different payments are characterised.

Redundancy Payments: If bonuses are being subsumed into a redundancy payment, the tax treatment might be more favourable (up to £30,000 of redundancy is tax-free).

Coordinate with an accountant on structuring to minimise tax.

What Happens to Future Bonuses?

Your settlement should address future bonuses during any notice period or garden leave:

If You're Working Notice: Bonuses should continue to be earned during notice. Your settlement shouldn't prevent you earning bonuses you would have earned if you remained employed through the payment date.

If You're on Garden Leave or Paid Notice: This is where disputes arise. If you're paid off and not working, are you entitled to bonuses you wouldn't have "earned"? Your settlement should clarify:

• Whether bonuses continue to be earned during garden leave or paid notice
• Whether performance targets must still be met
• Whether the company can withhold bonuses because you're not working

Generally, if you're paid through the notice period, you should also receive bonuses that would have been paid. Negotiate to confirm this.

Examples of Settlement Bonus Clauses

Well-drafted settlement agreements include clear provisions on bonuses:

"The Company acknowledges that the Employee earned Q1 bonus of £4,500 under the contractual bonus scheme. This will be paid [date].

For Q2, which has not yet been earned, the Company will pay £5,000 as compensation for the anticipated bonus that would have been earned had the Employee continued employment.

For accrued but unpaid holiday (8 days at £250/day = £2,000), this will be paid as part of the settlement on [date]."

Don't Overlook Small Amounts

It's easy to focus on big-ticket items (settlement amount, pension, reference) and overlook smaller accrued amounts. Don't make this mistake:

• Accrued commission might add thousands
• Unused holiday (multiplied by a reasonable daily rate) adds up
• Shift allowances or premiums through notice add to the total
• Expense reimbursements should be cleared

These small items, added together, often represent significant additional value. Don't settle without ensuring they're all accounted for.

Verifying Payment

Your settlement clause should specify when bonuses and benefits are paid. Ensure:

• Payment dates are specified and realistic (companies need time to arrange transfers)
• Payments are made gross (so you receive the full amount without tax deduction)
• You'll receive evidence of payment (payslips, transfer confirmations)
• If payment is missed, you have a remedy (additional compensation, breach of settlement)