Contractual bonus clauses

Often clients will ask when terminating an employee’s contract of employment what payments need to be made to terminate the contract lawfully and whether a contractual bonus should be paid in full or pro rata. A recent Court of Appeal decision gives helpful guidance.

In this case the employer decided to terminate the employee’s contract by making a payment in lieu of notice, rather than requiring the employee to work the notice period. If the employee had actually worked his notice period he would have been entitled to a bonus payment.

The Court of Appeal held that as the payment in lieu of notice clause did not set out what payment/s must be made upon termination and the bonus clause set out that the employee must be employed at the time the bonus is payable to be entitled to the bonus, the employee was not entitled to the bonus.

This case illustrates the importance of having clear contractual terms spelling out what happens to a bonus payment upon termination. These issues should be considered when drafting the contract of employment and the contract should clearly set out whether a bonus will be paid, paid pro rata (or some other arrangement) or not paid upon termination.

If there had been a clear contractual clause in this case it is likely that litigation and the related costs would have been avoided.