I spotted this interesting case on a point which comes up from time to time relating to an employee’s entitlement to bonus when the employment is terminated and a payment is made in lieu of notice.

The Court of Appeal in Locke v Candy and Candy Limited has found that a dismissed employee who received a payment in lieu of notice was not entitled to receive a bonus which they would have received had they worked their notice period.

Mr Locke’s contract of employment began on 17 September 2007. His contract stated that he would automatically be entitled to an £160,000 bonus after he had worked for his employer for 12 months. On 8 September 2008 his employment was terminated and he received six months’ salary in lieu of notice instead of being allowed to serve his notice period. Having missed out on a small fortune by a matter of days, Mr Locke was, unsurprisingly, somewhat upset and argued that had he received the proper notice he would have been entitled to the bonus.

Had there been no pay in lieu of notice clause the position would have been straightforward and Mr Locke would have been entitled to damages representing the loss of bonus (assuming he would otherwise have been entitled to payment of the bonus).

In this case though there was a pay in lieu of notice clause. However, as is often the case, when the contract has not been tightly drafted, the contract was not clear as to what the payment in lieu of notice was to consist of. Rather, the clause merely indicated “The Company reserves the right to make a payment in lieu of notice.”

Unfortunately for Mr Locke the contract stated that in order to receive the bonus "you must be employed by the company”. This proved fatal and the majority of the Court of Appeal held that they could not avoid the clear intent of this statement and found against Mr Locke.

Interestingly, Lord Justice Jackson dissented. He felt that the vagueness of the term ‘payment’ could not be ignored regardless of the clarity of any other clause. On this basis, he felt Mr Locke should be entitled to whatever payment would have been due to him had his employment been terminated with notice.

It is also worth noting that Candy and Candy Limited conceded that had the words “you must be employed by the company” not been present then both salary and bonus would have been payable.

Very often when a contract indicates that a pay in lieu of notice can be made the Company intends only that basic salary will be paid. However, in the absence of the contract specifying this, all other benefits which would otherwise be receivable by the employee during the notice period, including any bonus payments (assuming the employee would otherwise qualify for such a payment), also fall to be paid.

This case serves as a useful warning to employers that clear wording is needed when dealing with pay in lieu of notice clauses and bonus provisions.