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Case law round up relating to bonus payments

Posted on 20th December 2010
Case law

There have been a couple of interesting cases about entitlement to bonus payments. We round them up.

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Bonus entitlement as part of payment in lieu of notice

Locke v Candy & Candy Limited [2010] EWCA Civ 1350

Under the terms of his contract of employment Mr Locke was dismissed and paid in lieu of notice. The payment in lieu of notice clause did not say how the payment in lieu of notice would be calculated. Mr Locke was also entitled to a bonus. The bonus provisions stated that Mr Locke had to be employed at the time of payment to receive the bonus. The bonus was a significant £160,000.

The employer, Candy & Candy Ltd, did not pay the bonus as Mr Locke was not employed at the time the bonus was paid. He had been paid in lieu of notice. Mr Locke argued that any payment in lieu of notice should be calculated on the basis of the payments he would have received had he not been paid in lieu of notice and therefore inclusive of the bonus.

The decision

The Court of Appeal decided, considering the contract as a whole, that Mr Locke was not entitled to payment. Although the payment in lieu of notice clause was silent on how any notice payment would be calculated, the bonus provisions excluded payment of the bonus as part of any payment in lieu of notice.

In practice

Contracts of employment and bonus provisions should be carefully drafted. They should also be considered together to ensure that their combined effect is what is intended. For example, the bonus would have been payable if the bonus provisions had not excluded payment where the employee is no longer employed. It would also have been payable if the payment in lieu of notice had stated that payment would include basic salary and other benefits which would have been received during the notice period.

Withholding a discretionary bonus

Humphreys v Norilsk Nickel International (UK) Ltd [2010] EWHC 1867 (QB); [2010] IRLR 976

In this case, Mr Humphreys was a Chief Economist.  One of his duties was to forecast the price of nickel.  Under the terms of his contract of employment Mr Humphreys was entitled to a discretionary bonus based on his performance.  The maximum bonus was £660,000. 

In the final quarter of 2008 Mr Humphreys' forecasts were more than 50% out. For this reason his employer, Norlisk Nickel International (UK) Ltd, refused to pay any bonus to him. Mr Humphreys claimed that his performance overall should have entitled to him to a bonus of £572,000.

The decision

The High Court concluded that, as the decision by Norlisk not to pay a bonus was not irrational or perverse, Mr Humphreys was not entitled to a bonus. 

In practice

Employers can exercise their discretion to exclude payments of bonus provided that they do so on reasonable grounds and even though not all aspects of an employee's performance are bad or poor. Any decision should be taken on the basis of the specific provisions of the bonus scheme and the decision and reasons for it carefully noted in writing.

If you would like to make use of our hrlegaldocuments service and ask us to review your current provisions or to assist you with introducing revised provisions please do not hesitate to contact us. We can also assist and advise you if you wish to rely upon provisions to reduce or withhold a bonus.

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