In Locke v Candy & Candy Ltd the Court of Appeal considered whether a bonus payments are due as part of an employee's pay in lieu of notice (PILON).

When an employer decides they wish an employee to leave, it often wants them to stop working immediately. In this case it has two options: the employer can either summarily terminate the employment and make a payment in lieu of notice, or it can place the employee on garden leave. The right to do either will depend upon the wording of the employee's contract of employment. An employer has no implied right to terminate summarily and make a PILON. If the right to do so is not reserved in the contract of employment, making a PILON will constitute a breach of contract.

A PILON clause is therefore often inserted into the employment contracts of key or senior employees. It is prudent for the clause to specify whether the employee's entitlement will be to a payment in lieu of their basic salary only, or also in respect of other benefits or bonus that would have fallen due during the notice period.

The Court of Appeal has held that an employee's PILON entitlement did not include the guaranteed bonus he would have received if he had still been employed during the notice period. The PILON clause did not specify what the employee was entitled to be paid, and the bonus clause stated that the employee had to be employed to receive the bonus.

This case illustrates why the contract should define what is due under a PILON clause, whether basic salary alone, salary and benefits, or salary, benefits and bonus. It also illustrates why bonus and PILON clauses should be considered together when drafted, never in isolation.

Employers should be careful to check whether they are exposed in this regard. Particularly where bonus entitlement forms a significant part of an employee's remuneration package, employers should consider whether they wish to be able to terminate the employment just before the date the bonus falls due. Care should be taken in such a case to ensure that both the bonus and the PILON clause achieve maximum protection.