Articles
What are the Bonus Entitlements on Payment in Lieu of Notice?
One of the most contentious issues to arise when employment is terminated is that of bonus entitlement. Many employees lobby aggressively for their full bonus on a severance payment and frequently resort to Court proceedings when they don't get it. Employers will usually deny that the employee is entitled to the bonus.
But what is the position when the employee has a pay in lieu of notice clause ("PILON") in his employment contract and the PILON fails to state what is payable on the termination? Is the bonus payable as part of the employee's salary that he would have received during the PILON period?
The position of the employer has now been strengthened in a decision of the Court of Appeal (Locke v Candy and Candy Limited).
Mr Locke was entitled to two guaranteed bonuses of £40,000 and £160,000 during his first year of employment. His contract contained a PILON clause and stated that in order for Mr Locke to receive the bonus he had to be "employed by the Company". Mr Locke's employment was terminated with pay in lieu of notice a matter of days before the second bonus of £160,000 became due.
Mr Locke considered that he was entitled to receive the bonus and brought a High Court claim for breach of contract. He argued that if he had been placed on garden leave for 6 months or told to work his 6 months notice then he would have been entitled to the bonus and as such it should have been included with his salary and other contractual rights in the PILON termination payment. He argued that as the PILON failed to specify what payments he was entitled to as part of the PILON payment, and that he must therefore be entitled to the bonus which fell due during the PILON period.
The Court of Appeal found that the PILON and bonus clauses were not well drafted. As such, they had to look at the contract and interpret them "holistically". The Court found the deciding factor was the "natural reading" of the contract as a whole. The words "you must be employed by the Company in order to receive the bonus" must therefore be given a common sense interpretation. Clearly, as at the time the payment fell due, Mr Locke was no longer an employee of the Company and as such he was not entitled to receive the bonus as part of his PILON payment.
Whilst this is a victory for common sense it also highlights the importance of having clearly drafted PILON and bonus clauses.
If there had been no PILON clause in the employment contract then Mr Locke may have been entitled to receive his £160,000 bonus as damages together with his gross, not net, salary for the notice period. However, there was a PILON clause, but it was poorly drafted and failed to specify precisely what payments Mr Locke should receive as part of the PILON clause. For this reason it is very important to ensure that employment contracts contain the express right to make payment in lieu of notice and clearly state what is to be paid.
Secondly, where a bonus entitlement forms a significant part of an employee's package care should be taken to ensure that the bonus is not payable if the employer decides to terminate the contract of employment. In the present case the Court held that this was achieved by the use of the words "you must be employed by the Company in order to receive the bonus". However, there was some doubt on the part of some members of the Court, and as such it would also be wise to make it clear in the bonus clause that a bonus will not be paid if an employee is under notice or has received pay in lieu.
For more information on the above or for advice on any other employment issue please contact our employment department on 020 7354 3000 or e-mail employment@colmancoyle.com
Author Profile: David Malamatenios
Date published: 5th January 2011