How to Arrange a Bonus in Your Settlement Agreement

A bonus in a settlement agreement (vaststellingsovereenkomst, VSO) means that the arrangements around variable pay, such as an annual or one-off bonus, are explicitly settled when your employment ends by mutual consent. The employer and employee set out whether the bonus will still be paid out, over which period and under what conditions. This directly affects your total exit package, your entitlement to WW (unemployment benefit) and sometimes your tax position too. In this article you will read how to arrange the bonus in a settlement agreement properly, both legally and practically, and what role outplacement can play in this.

What exactly does a bonus in a settlement agreement mean?

A settlement agreement (vaststellingsovereenkomst, VSO) is the agreement by which employer and employee jointly end the employment, without the involvement of a subdistrict court judge or the UWV (the Dutch employee insurance agency). This agreement usually contains arrangements about the end date, the transition payment (transitievergoeding), the final settlement and any additional payments. In practice, the bonus often falls under those additional payments or under the normal salary components.

In many roles the salary consists of a fixed part and a variable part. That variable part can be an individual bonus, a team or company bonus, a commission scheme or a profit-sharing scheme. It is precisely when employment ends via a settlement agreement that discussion arises about this variable pay: are you still entitled to it, and if so, over which period and under what conditions? By setting this out clearly, you prevent disputes afterwards.

The bonus can feature in the settlement agreement in various ways. Sometimes only the bonus already accrued is paid out, sometimes part of the future bonus is bought off, and in other cases the bonus is rejected entirely. The room for negotiation depends on your contract, your role, the reason for dismissal and the bargaining power on both sides.

• The bonus can be part of your regular salary and therefore of the final settlement.
• The bonus can be converted into a separate severance payment.
• The bonus can be bought off as part of an overall exit arrangement.
• The bonus can be tied to conditions, for example the achievement of targets.

Which types of bonus play a role in dismissal?

Not every bonus works the same way when employment ends. Under Dutch employment law, what matters above all is whether it concerns a fixed, structural bonus or a discretionary bonus, where the employer may decide each year whether to pay out. In practice there are several variants, which can all play out differently in your settlement agreement.

A structural bonus is variable pay that you receive every year if you meet criteria set out in advance. Think of an annual performance bonus of 10% of your annual salary, laid down in your employment contract or staff handbook. Such a bonus is often regarded by the courts as a salary component. When employment ends, at the very least a proportional part of the bonus up to the date of dismissal then usually belongs in the final settlement.

A discretionary bonus is a bonus that the employer can award at its own discretion, without a firm claim for the employee. Even so, it is not the case that you can never claim anything. If an employer consistently pays out the same bonus for years, a customary right can arise. In the negotiation about the bonus in the settlement agreement, you can use that as an argument.

• Structural performance bonus based on individual targets.
• Company bonus or profit share, depending on the result of the organisation.
• Commission, for example in sales roles.
• One-off retention or loyalty bonus in a reorganisation (reorganisatie) or on project completion.

Why is the bonus so important in the VSO?

The bonus sometimes seems like a detail, but in practice it often involves substantial amounts. For higher-graded roles, the annual bonus can easily add up to a few months’ salary. That is precisely why the way the bonus is factored into the settlement agreement has a major impact on your financial buffer and on your next career step.

First, the bonus directly determines how much money you actually receive on dismissal. If, for example, your variable pay is on average 20% of your annual salary, then not including the bonus quickly costs you thousands of euros. This can make the difference between taking time in a relaxed way for an outplacement programme and having to apply for jobs under pressure straight away.

Second, the bonus sometimes plays a part in the calculation of your transition payment. Under the Work and Security Act (Wet werk en zekerheid, WWZ), the calculation of the transition payment must be based on the gross monthly salary including fixed salary components and structural variable pay. Think of an average bonus over the past three years. The way in which you make the transition payment calculation align with your bonus history therefore deserves extra attention.

• The bonus co-determines the size of your total exit package.
• The bonus can form part of the basis for the transition payment.
• The bonus influences the room to invest in your career, for example via outplacement.
• A clear bonus arrangement prevents disputes and legal proceedings afterwards.

How does the bonus work in the calculation of your severance payment?

When employment ends via a settlement agreement, there is usually a severance payment. That payment is often at least equal to the statutory transition payment, and sometimes higher due to additional arrangements. The question is then: does the bonus count, and if so, how is it processed in the calculation?

Under the rules for the transition payment, the basis is your gross monthly salary, including fixed allowances and structural variable pay. If your bonus is paid out every year and is laid down in your terms of employment, then an average over the last three calendar years is often taken. That average is converted into a monthly amount and added to your salary. Via the severance payment calculation you can gain insight into what that sum looks like in your situation.

In a settlement agreement you can agree that the employer pays a higher amount than just the statutory transition payment. In that case you can have the bonus feature in two ways: as part of the basis for the transition payment and as a separate, additional bonus component. The latter happens, for example, if you were about to receive an annual bonus but your employment ends just before then.

• Check whether the bonus is structural and stated in your contract or scheme.
• Calculate a three-year average of your bonus for the transition payment.
• Negotiate an additional payment if you were nearly entitled to a bonus.
• Clearly set out whether the bonus is paid gross or net.

Including the bonus in negotiations: how do you approach this strategically?

Negotiating the content of a settlement agreement is daunting for many employees. The employer often already has a standard proposal ready, in which the bonus is included only to a limited extent or not at all. Yet in practice more is often possible, especially if you make a solid case for why the bonus is a legitimate part of the arrangement.

A strong starting point is knowing exactly which bonus arrangements are stated in your employment contract, bonus regulations or collective labour agreement (CAO). Gather earlier payslips showing bonuses and appraisals, so that you can demonstrate that the bonus has been paid out structurally. This makes it easier to convince the employer that the bonus is part of your normal salary and should therefore be included. It also helps with including the bonus in the negotiation about the overall exit arrangement.

In addition, it is wise to think about your room to negotiate. If the employer is keen to reach an agreement quickly, you can propose trading part of the bonus for other arrangements, such as a longer period of continued salary payment or funding of an outplacement programme. Outplacement gives you guidance towards new work, which can work out positively for both you and the employer.

• Map out all bonus arrangements and earlier payments clearly.
• Calculate for yourself what you lose if the bonus is not included.
• Link your request to reasonable arguments, such as customary right and agreements made.
• Explore whether you can convert part of the bonus into guidance towards new work.

The role of the UWV and WW entitlements in bonus arrangements

In a dismissal by mutual consent via a settlement agreement, the UWV (Uitvoeringsinstituut Werknemersverzekeringen, the Dutch employee insurance agency) looks above all at two things: whether there is no question of culpable unemployment and whether the notional notice period (fictieve opzegtermijn) has been observed. The bonus itself is usually not decisive for entitlement to a WW benefit, but it can affect the level of your income in the final months.

For your WW benefit, the UWV determines your daily wage on the basis of your sv-loon (social insurance wage) during the reference period. If your bonus was paid out in that period and falls under the sv-loon, then it counts in the calculation of your WW daily wage. This means that a bonus in the final months before dismissal can indirectly affect your WW amount. At the same time, a one-off higher severance payment does not automatically lead to a lower WW benefit, as long as the dismissal is not culpable.

It is therefore important that your settlement agreement is worded in such a way that the UWV does not regard your unemployment as culpable. Neutral reasons for dismissal are often chosen, such as a difference of insight or a reorganisation. When working out the bonus in the settlement agreement, it is wise to check whether the arrangements align logically with your salary history, so that no questions arise with the UWV.

• The UWV looks above all at the reason for dismissal and the notice period.
• Bonuses that fall under the sv-loon can raise your WW daily wage.
• A high severance payment does not directly affect your WW entitlements.
• A carefully worded VSO prevents extra questions from the UWV.

Practical examples: how can a bonus arrangement play out?

To make the impact of a bonus in your settlement agreement more concrete, it is useful to look at a few real-world examples. These examples are simplified, but they clearly show which choices you can make and what effect they have on your total exit arrangement and your career step afterwards.

Suppose you have an annual salary of 60,000 euros gross and receive on average 10,000 euros in annual bonus, and have done so for five years in a row. Your employer offers a VSO in which only your fixed salary is included in the transition payment. By demonstrating your bonus history, you can argue that this 10,000 euros per year is structural variable pay. If the employer agrees to this, the basis for your transition payment rises, which immediately produces a higher payment.

Another example is an employee who is offered a settlement agreement just before the annual bonus payout. The employer wants to end the employment as of 1 March, whereas the bonus is normally paid out in April. In the negotiation you can then propose to include the expected bonus (in whole or in part) as a separate amount in the VSO. This is then included as part of the payment under a VSO, for example under the heading of “additional severance payment”.

• A structural bonus can increase the basis of the transition payment.
• A nearly earned bonus can be recorded as a separate payment.
• Foregoing a bonus can be compensated with other benefits, such as outplacement.
• Clear examples help to sharpen your negotiating position.

Bonus, transition payment and outplacement: how do you tie it together logically?

When employment ends, there is usually more at play than just money. Many employees want to know how they can get back to work as quickly and effectively as possible. Using part of the severance payment or bonus for career guidance or outplacement can then be a wise choice. Outplacement is guidance towards new work, in which you work on self-insight, application skills and finding suitable roles.

In the settlement agreement you can agree that the employer pays part of the bonus or an additional payment directly to an outplacement agency, such as Care4Careers. This can be attractive both from a tax and a practical point of view, because the payment is then deployed in a targeted way for your sustainable employability. In this way the employer also shows that it acts in a socially responsible manner, which often fits well with reorganisations or long-standing employment relationships.

You can therefore broaden the negotiation about the bonus beyond just an amount in your account. Think about what you need in the period after dismissal: time, guidance, retraining or precisely a financial buffer. By aligning the arrangements about the bonus, the transition payment calculation and outplacement with each other, an exit arrangement arises that is sound both financially and in substance.

• Part of the bonus can be used for an outplacement programme.
• Outplacement increases the chance that you will find suitable work sooner.
• Employers increasingly combine payment and guidance in one package.
• A good balance between money and guidance provides peace of mind in an uncertain period.

What else should you watch out for with bonus arrangements in the VSO?

Besides the amount and the type of bonus, there are a number of practical points of attention that are often overlooked. One of these is the relationship between the bonus and your other salary components, such as holiday allowance, thirteenth month and outstanding holiday days. Sometimes there are derived entitlements, for example if your bonus counts towards pension accrual or holiday allowance.

The tax treatment of the bonus is relevant too. Bonuses and severance payments are as a rule taxed as income from employment. This can mean that a large one-off payment falls into a high tax bracket. It is therefore wise to discuss with a financial adviser or tax specialist whether spreading it out, a different form of payment, or investing in training or outplacement is more advantageous for you.

Finally, it is important that all arrangements are set out clearly and unambiguously in the settlement agreement. Vague wording such as “any bonus will be determined reasonably” leaves room for dispute and disappointment. Clear amounts, clear periods and explicit references to bonus schemes prevent uncertainty later on about what exactly was agreed.

• Check the coherence between the bonus and other salary components.
• Watch out for the tax consequences of a one-off high payment.
• Have amounts and periods recorded concretely in the settlement agreement.
• Avoid open wording that could lead to dispute later on.

In summary: how to make sure your bonus is arranged properly

A bonus in a settlement agreement touches on several parts of your dismissal arrangement: your entitlement to variable pay, the size of your transition payment, your WW daily wage and the room to invest in your further career. Those who prepare for this well can often achieve a better and more balanced result than if the employer’s standard proposal is accepted without more ado.

The essence is that you know your rights around the bonus, get your own figures well in order and then negotiate carefully about the form and size of the payment. It helps here to look not only at the amount, but also at what you need for the next step in your career. Think of guidance, training or time to orient yourself towards a new direction.

By aligning the arrangements about the bonus, the severance payment, dismissal by mutual consent and any career guidance well with each other, a settlement agreement arises that genuinely fits your situation and future plans. That provides peace of mind in a stressful period and increases the chance of a sustainable and suitable next step in the labour market.

Common mistakes around bonus and settlement agreement

Finally, it is worthwhile to consider a number of common missteps in practice. Those who are aware of these can ask more targeted questions and prevent important elements from remaining undiscussed. That certainly applies to complex pay structures with several types of bonus and commission.

A first mistake is that employees assume the employer will of its own accord calculate “fairly” with the bonus, without reading the arrangements themselves. If there is no explicit provision about the bonus in the settlement agreement, that is often to the employee’s disadvantage. We also regularly see that employees look only at the total amount, without checking whether the underlying components (bonus, transition payment, final settlement) are built up logically.

A second mistake is that too little thought is given to the long term. A slightly higher bonus now can feel pleasant, but sometimes investing in guidance towards new work is ultimately more valuable. Those who, for example, create room for professional support through a well-set-up approach to negotiating hard over your payment considerably increase the chance of a sustainable new job.

• Not having the bonus explicitly included in the settlement agreement.
• Looking only at the total amount and not at how it is built up.
• Paying no attention to the tax and legal details.
• Underestimating the value of guidance and outplacement in the negotiations.

Bonus, final settlement and completion of the employment

The completion of the employment is more than a signature under the VSO. In practice, the bonus, the regular salary components and other entitlements are brought together in the final settlement. There you will see, among other things, your last salary, holiday allowance, payment of untaken holiday days, any overtime and the agreed bonus or variable pay.

It is wise to check the final settlement carefully as soon as you receive it. Do the amounts match what was agreed in the settlement agreement? Has the bonus been processed correctly, and have no unexpected deductions been made? You can then still raise any unclarities with your (former) employer in good time.

By dealing consciously with the bonus in your settlement agreement in this way, you not only make a strong financial choice, but also lay a solid foundation for the next step in your career, whether or not with the support of a professional outplacement programme.

Considering the bonus and severance payment together

When the bonus becomes part of the discussions about your dismissal, it is important to keep seeing the overall picture. The bonus does not stand apart from the other payments; together they all form your exit arrangement. A good balance between a realistic severance payment, a fair bonus arrangement and any support towards new work is often more valuable than trying to squeeze the maximum out of one element.

In practice, it is wise first to determine what your minimum and desired total package is. Within that, you can shift between different components: a higher or lower bonus payment, an extra month’s salary, or precisely a generous budget for guidance. Those who know their own priorities well can negotiate in a more targeted way and are less likely to be tempted to agree to a proposal that seems attractive in the short term but is less suitable in the longer term.

By considering your bonus, your other entitlements and your future plans together, a calmer and better-considered negotiation process arises. This helps not only with closing off your current job, but also with starting a new phase in your career.

The place of bonus arrangements within outplacement and career guidance

Outplacement and career guidance are at their core about perspective: where do you stand now, and which next step suits your talents, values and stage of life? The bonus in your settlement agreement is then not only a financial topic, but also a means to make that next step possible. Those who have sufficient financial room can often choose more consciously for retraining, an interim period or a different direction.

Care4Careers guides employees and employers with outplacement, second-track reintegration (re-integratie tweede spoor, spoor 2) and career questions. In conversations about dismissal and settlement agreements, the question of variable pay and bonus regularly comes up. Not to take over the negotiation, but to think along about what is wise in the light of your career. In this way, bonus arrangements, severance payment and guidance towards new work can be discussed in a coherent way.

Those who deliberately deploy their bonus arrangements as part of a broader career plan increase the chance that the dismissal marks not only an end, but also the beginning of a new, suitable phase in working life.

Bonus and grounds for dismissal: the influence of the reason for ending the employment

In assessing bonus arrangements, the grounds for dismissal sometimes play a subtle role. Legally, the employer may, for example, reduce the transition payment or even refuse it entirely in the case of seriously culpable conduct by the employee. In practice, however, neutral wording is usually chosen in a settlement agreement, precisely to prevent discussions with the UWV and possible proceedings.

Nevertheless, the background to the dismissal can influence the employer’s willingness to include a bonus. In the case of a dismissal for business-economic reasons or a reorganisation, there is often more understanding for including a proportional part of the bonus, especially if the company has performed well. In cases of long-standing underperformance files or trust issues, the employer may be more reluctant with extra payments.

By understanding well how the grounds for dismissal, the bonus and the total payment relate to each other, you can more realistically assess what is achievable in the negotiations and which arguments are most convincing in this respect.

The relationship between bonus, non-competition and other clauses

Finally, it is important to look at the coherence between the bonus and other clauses in the settlement agreement, such as a non-competition clause, non-solicitation clause or confidentiality clause. Sometimes the employer’s willingness to pay out a bonus (in whole or in part) is linked to arrangements about what you may or may not do after your departure.

If, for example, you agree to a stricter non-competition clause than the one in your original contract, that can limit your chances in the labour market. In such a case, it is reasonable to ask for a higher payment or an extra bonus payment as compensation for this restriction. Conversely, having a non-competition clause lapse or relaxing it can precisely create room for a different distribution of the payments.

By not viewing the bonus in isolation from clauses of this kind, but looking at everything as one coherent package, you prevent yourself from later regretting arrangements that seemed favourable at first sight but turn out to be restrictive in practice for your further career.

Documenting and safeguarding bonus arrangements properly

When the negotiations have been concluded and the settlement agreement has been signed, the implementation phase begins. It is then crucial that you document all arrangements about the bonus, the severance payment and the other salary components well. Keep the signed VSO, the underlying bonus schemes and your latest payslips in a safe place.

Then, when payment is made, check whether everything matches what was agreed. Watch out for the amounts, the deductions and the description of the payments. If there are discrepancies, it is wise to raise questions about them quickly and in writing with your (former) employer, so that any errors can be corrected in good time.

By not only negotiating your bonus arrangements well, but also safeguarding them carefully in the implementation phase, you ensure that the arrangements made are actually honoured and that you can continue to build on your career with peace of mind.

Are you in doubt about what your VSO says? Have your settlement agreement reviewed by an expert from Care4Careers, so you can be sure you are not overlooking anything.