A settlement figure can look reassuring until you realise that your annual bonus is due shortly after your employment ends. The question, does settlement cover future bonuses, is not answered simply by looking at the headline payment. It depends on your contract, the bonus scheme rules, the reason and date your employment ends, and – crucially – the wording of the settlement agreement.
For some employees, a bonus is a valuable part of total pay. This is particularly true for senior staff, sales roles and those paid under commission, incentive or long-term award arrangements. Before signing, make sure the agreement deals with that value clearly rather than leaving it to assumption.
Does a settlement cover future bonuses?
A settlement agreement may cover future bonuses, but it does not automatically do so. In many cases, the employer will draft the agreement to settle all claims connected with your employment and its termination, including any claim for a bonus, commission or other incentive payment.
That broad waiver does not necessarily mean you are being paid for the bonus. It may mean that, in return for the settlement payment, you agree not to pursue a potential bonus claim later. Whether that is fair depends on the strength and likely value of the entitlement you are giving up.
The safest approach is to separate two questions. First, are you contractually entitled to a bonus or likely to have a claim for one? Second, if the position is uncertain or disputed, has the settlement payment properly reflected the value and risk of that claim?
The agreement should say explicitly whether a bonus is paid in addition to the settlement sum, included within it, or not payable. Ambiguity can be expensive once the agreement has been signed.
Start with the contract and scheme rules
Your employment contract is the starting point, but it may not be the complete answer. Bonus schemes are often governed by separate plan rules, annual letters, commission schedules or policy documents. Ask for the current version if you do not have it.
Contractual bonus rights
A contractual bonus may be payable when specified conditions are met. For example, a contract might provide for a percentage of revenue generated, a fixed payment on achieving a target, or a pro-rated annual bonus. If the conditions have been satisfied, an employer may have limited scope to withhold payment simply because a settlement is being discussed.
Even here, the detail matters. A clause may require you to be employed and not under notice on the payment date. It may permit a pro-rata calculation where you leave part way through the year, or it may make payment conditional on company performance. A term that appears straightforward can change significantly once read alongside the plan rules.
Discretionary bonuses
Many bonuses are described as discretionary. This does not always end the discussion. An employer may retain discretion over whether to make an award and how much to pay, but it must exercise that discretion rationally and in good faith. The employer should not apply the scheme in an arbitrary, capricious or discriminatory way.
That said, challenging a discretionary bonus can be less certain than enforcing a fixed contractual entitlement. A settlement agreement is often used to resolve that uncertainty. The relevant issue becomes whether the proposed sum is a sensible compromise in light of your performance, past awards, business results and the terms of the scheme.
Commission and sales incentives
Commission is frequently treated as a bonus, but its legal position may be different. If commission has been earned under a contractual formula before your termination date, it may be wages due rather than a future discretionary award.
Check when commission is defined as earned. Is it when you secure an order, when the customer signs, when the customer pays, or when goods or services are delivered? Also check whether a clawback provision applies and whether the agreement preserves payment for pipeline sales completed after you leave.
Dates can decide the outcome
Two dates commonly create difficulty: your termination date and the normal bonus payment date. Being asked to leave before a bonus is paid does not by itself decide whether you lose it, but the scheme may contain a valid requirement to remain employed on that date.
You should also consider whether you will work notice, be placed on garden leave or receive payment in lieu of notice. During garden leave, you remain employed, which may help where the scheme requires continued employment. A payment in lieu brings employment to an end sooner, potentially affecting eligibility.
Where an award relates to a completed performance year, it may be reasonable to seek payment in full or on a pro-rata basis even if payment is scheduled after termination. Where it relates mainly to future service, the employer may have a stronger argument that no payment is due. There is no single rule that fits every scheme.
What the settlement agreement should say
A well-drafted agreement should not leave bonus treatment buried in a general waiver clause. Look for a specific provision dealing with each relevant plan, particularly where the amounts are material.
It may state that a defined bonus or commission payment will be made, identify the gross amount or calculation method, and give a payment date. If the figure is not yet known, it should explain how and when it will be calculated. It should also confirm whether normal deductions for tax and National Insurance will be made.
If the employer says no bonus is payable, the agreement should make clear whether the settlement sum includes compensation for the loss or disputed value of that entitlement. This matters because signing usually prevents you from later bringing the employment claims listed in the agreement.
Be particularly careful with wording that says you have received all salary, benefits, bonus, commission and other sums due. Do not confirm that statement if a payment remains outstanding, is disputed, or has not been properly calculated. The same caution applies to clauses confirming that you have no rights under incentive plans, share plans or deferred remuneration arrangements.
Future bonuses, deferred awards and share plans
The word “bonus” can hide several different forms of remuneration. A cash annual bonus is only one example. You may also have deferred bonus awards, retention payments, profit share, carried interest, restricted shares, options or long-term incentive plan awards.
These arrangements often have good leaver and bad leaver provisions. The circumstances of your departure may affect whether awards vest, lapse, accelerate or remain subject to future conditions. A settlement agreement should not casually categorise you as a bad leaver if that would cause substantial loss.
For senior employees, the value of outstanding awards can exceed the proposed termination payment. The plan documents, award notices and board discretion should be reviewed alongside the settlement agreement. It may be appropriate to negotiate a specific treatment of each award rather than accepting a broad statement that all incentives lapse.
How to assess whether the offer is fair
There is no automatic formula for pricing a future or disputed bonus. A practical assessment considers the wording of the scheme, your eligibility on the relevant date, performance already achieved, previous awards, financial results and the cost and uncertainty of pursuing a claim.
Your negotiating position is usually stronger where the entitlement is contractual, targets have been met, the payment relates to work already completed, or colleagues in comparable positions will be paid. It may be weaker where the award is genuinely discretionary, the business has performed poorly, or continued employment on the payment date is an express and enforceable condition.
You do not need to accept the employer’s first characterisation of the payment. If they say it is entirely discretionary, ask what discretion is being relied upon and whether prior practice supports their position. If they say it is included in the settlement figure, ask how that figure was calculated.
Practical steps before you sign
Gather your contract, bonus plan rules, annual award letters, recent payslips and any communications about targets or expected payments. If you have sales-related pay, retain records that show completed deals and the point at which commission is earned.
Then check the termination date, notice arrangements and payment clauses in the proposed agreement. Identify every scheme or award that could be affected. It is better to raise a point before signing than to argue later that a general settlement was not meant to include it.
A valid UK settlement agreement requires you to receive advice from an independent relevant adviser. That advice should cover the effect of the agreement and the claims you are waiving. At Arcos Settlement Agreements, a focused review can also identify whether a bonus, commission or incentive issue needs clearer wording or further negotiation before you decide.
Your next role may be the priority, but a clean transition should not require you to overlook remuneration you have already earned or could reasonably negotiate. Ask for clarity, ensure the agreement reflects the actual deal, and sign only when you understand what you are receiving and what you are giving up.