The Court of Appeal has held that an employee who was summarily dismissed with a payment in lieu of notice (PILON), shortly before his bonus payment was due, was not entitled to the bonus even though he would have qualified for it had he still been employed during the notice period.

The claimant, Mr Locke, was employed as a director of a firm of property developers on 17 September 2007. His contract stated that he would be entitled to a £160,000 bonus after 12 months employment though he 'must be employed by the company in order to receive the bonus' on the 12 month anniversary. The claimant, having been given six months pay in lieu of notice in accordance with the terms of his contract of employment, then sought to recover the bonus payment. He had been dismissed with immediate effect ten days short of the 12 month anniversary. Under the PILON clause the employer was permitted 'to make a payment in lieu of notice'. The clause did not state the measure of that payment and, therefore, the issue was whether the payment should include the £160,000 bonus which he would still have received had he been asked to work his notice and/or been put on gardening leave rather than being summarily dismissed.

The Court of Appeal held that the contract had to be construed ‘holistically’. Accordingly, as the PILON clause dealt only with termination and not quantification, the bonus clause (and its restricted operation whereby it was only payable if the employee remained an employee at a given date) had to be applied when calculating the value of the payment. This meant that as he was not employed on the 12 month anniversary he was not entitled to the bonus.

What does this mean for employers? Whilst it does show that a PILON clause can be used to minimise or avoid some payments, best practice would be to clearly define what payments will be made under a PILON clause. For example, is this to be limited to basic salary; salary and benefits; or salary, benefits and bonus? It also emphasises the importance of considering bonuses and PILON clauses together when preparing contracts of employment.