Question: should I receive a bonus payment under my settlement agreement?

Chris Hadrill, a specialist employment solicitor at Redmans, answers the question:

“I am currently negotiating a settlement agreement with my employer and am arguing that I should receive a pro-rata proportion of this year’s bonus payment. My employer is refusing this so far. What can I do?”

There are two separate sets of questions in the above: whether an employee is legally entitled to receive their bonus upon termination of their employment and, secondly, whether it is common for employees to receive a bonus under their settlement agreement even if they aren’t legally entitled to it.

Whether an employee is legally entitled to receive their bonus upon termination of their contract of employment depends upon three issues: firstly, the date on which it would normally be decided whether the employee would be entitled to receive a bonus for the particular financial year (“the Bonus Decision Date”); secondly, whether the termination date of the employee’s employment (“the Termination Date”) falls before or after the Bonus Decision Date; and, thirdly, what the contractual terms of the bonus are (e.g. whether the bonus is mandatory or discretionary, whether there has been a custom and practice of paying bonuses and, if so, how much has generally been paid etc.).

The employee will first have to determine what their usual Bonus Decision Date. Once the employee has done so, if the Bonus Decision Date falls on or before the Termination Date then it is generally possible to argue that the employee should be paid a bonus (the situation becomes slightly more complex if the employee is being paid in lieu of notice – in this circumstance whether the employee is entitled to a bonus payment will depend on whether there is a payment in lieu of notice clause (“PILON clause”) in the employee’s contract of employment and, if so, what the terms of that PILON clause are); if the Termination Date falls before the usual Bonus Decision Date then it is generally not possible to cogently argue that the employee should receive a bonus under the settlement agreement.

If the Termination Date does fall on or after the Bonus Decision Date then whether the employee is entitled to a bonus under their settlement agreement will depend upon a variety of factors, including (among others):

1. Whether the employee’s entitlement to a bonus is discretionary or absolute (normally the employee’s entitlement to a bonus is discretionary in respect of whether the employee should receive a bonus and, if so, how much)
2. Whether there has been a custom and practice of paying bonuses during the employee’s employment; and
3. Whether there has been a custom and practice of paying bonuses in cases where an employee leaves under the terms of a settlement agreement

The employee should carefully check their contractual documents (or get their lawyer to check them) to determine whether there is a bonus clause and, if so, what the terms of that bonus clause are. The employee should also create a chronology of when they have received bonuses in the past and how much they have tended to receive. If possible (and being careful not to contravene the terms of any settlement agreement the employee may have been offered) the employee may wish to try and see what departing employees leaving under settlement agreements have been offered in respect of their bonuses (it can be difficult to determine this, though, as other (ex-)employees may be reluctant to be forthcoming about the terms of their settlement agreement for a variety of reasons).

If you believe that you should be receiving a bonus under your settlement agreement then it is advisable to ask your lawyer to check this for you and, if appropriate, return to your employer to negotiate this for you.