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Sejal Raja reports on the Court of Appeal case of Locke v Candy and Candy Limited which focused on a claim for an unpaid bonus.

It is a very common feature of contractual terms relating to bonuses that the employee has to be in employment on the date the bonus is paid. It follows that it can benefit an employer to effect a dismissal before that date and hope that this will avoid the need to pay bonus. Dismissals for this reason are common in January and February.

In Locke v Candy and Candy Limited [2010] EWCA Civ 1350 the Court of Appeal had to deal with such a case. The contract contained a payment in lieu of notice clause (PILON). It was very simply expressed saying only that the company reserved the right to pay in lieu of notice. The contract also contained terms relating to a guaranteed bonus payment. In case any reader is unduly excited at this point it should be said that the employee was a chartered surveyor not a banker or bond dealer. The term relating to the guaranteed bonus was that it became payable after twelve months service. The employment began on 17 September 2007. Ten days within the twelve­ month period the employee was dismissed and told he would receive payment in lieu, which he duly did in six monthly instalments.

The employee took legal action to claim the bonus. He lost at first instance and appealed. He was given leave to appeal because a High Court judge said that the PILON clause was lacking in precision. That seems certainly to have been correct as the Court of Appeal gave a split decision.

One judge held that the employee was entitled to the bonus. He was particularly exercised by the fact that the clause relating to the requirement to be in employment to receive the bonus appeared in a different part of the contract to the PILON clause. He also thought it unattractive for an employer to be able in this way to take the benefit of eleven and a half months hard work and then evade the payment of the bonus by a timely summary dismissal. He implied that a court should lean against a construction that permitted this conduct.

The other two judges found for the employer. One pointed out that the contract said nothing about how the PILON was to be calculated. She had no difficulty about the location of the sentence requiring employment to subsist to receive bonus. She rejected the suggestion that this clause implied only that there was no right to a pro­rata calculation. She thought the interpretation was difficult but that the more natural meaning was that once employment ended the right to bonus ended as well. The third judge found that the term relating to the employment ending was “integral” to the terms on which bonus was paid. It is noticeable that neither of these two judges said anything relating to the morality of the employers conduct. They treated the case simply as one of construction. Possibly this is not surprising as none of the judgments found explicitly that the reason for the dismissal was to avoid making the bonus payment. This may be thought of as unduly technical but it does take the case outside the realm of another decision of the Court of Appeal which has indicated that such a reason for dismissal might give an employee a cause of action. 

So in this case the employer succeeded. The case does make clear, however, how carefully such clauses should be drafted and that a little more effort by the employer when preparing this agreement could have avoided a deal of expense. Also employees are well advised to scrutinise clauses like this with great care.

For guidance on drafting employment contracts, policies and procedures, contact our employment lawyers.