No bonus payable when PILON clause used for early termination

In Locke v Candy & Candy a dispute over the wording of an employee's contract had to go to the Court of Appeal to be resolved but, even then, the three judges were split 2:1 in their decision.

The dispute focused on a clause in the contract which provided for payment of a bonus on a specific date, but also stated 'You must be employed by the company in order to receive the bonus'.

The employee was entitled to six months' notice of termination but a further clause allowed the company the option of making a payment in lieu of notice instead. The company opted to do so. The result was that the employee thus did not work his notice period and so was not still employed at the date when the bonus became payable. If he had worked his notice, he would have been entitled to receive the bonus. The question for the Court: was he entitled to the bonus?

The employee's application for summary judgment was rejected. He appealed to the Court of Appeal but has now lost his appeal. Two of the three judges in the Court of Appeal considered that the contract had to be read as a whole and the words had to be given their natural meaning. On this basis, they decided that the phrase 'You must be employed... in order to receive the bonus' should be read as applying to a situation just like the one that had occurred. The contract had already terminated so the employee was not entitled to a bonus but only to a 'payment in lieu of notice'.

Points to note:

  • As the Court of Appeal noted in its judgment a 'payment in lieu of notice' may, or may not, be 'pay' depending on the circumstances. In most cases, such as this one, it is not pay because it is not a payment for work done under the employment contract but simply part of a mechanism that allows for early termination.
  • This case was decided almost entirely on the specific wording of the employment contract. It is very important, when dealing with issues such as entitlement to bonus or commission, that care – and expert advice – is taken over the wording of an employment contract. Clarity of wording helps to avoid future argument.