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Bonus scheme rewards ex-employee with £70,000 bonus

The recent case of Rutherford v Seymour Pierce Ltd serves as a reminder that employers must include an express term in the employment contract or bonus scheme to be sure that an employee, who has worked during the relevant performance period, is not entitled to a bonus if he has left employment by the payment date.

The facts of the case

Seymour Pierce Ltd (“Seymour Pierce”) operated a bonus scheme under which 40% of the commission earned by employees was paid into a bonus pool. Half of the anticipated pool was paid out at the end of the third quarter, with the balance of the amount due paid out after the fourth quarter.

Mr Rutherford, who was dismissed during the last quarter, brought a claim for the balance of the bonus payment relating to the last quarter.

The bonus scheme did not have an express term saying that a participant had to be in employment on the day of payment. However, Seymour Pierce claimed that it was an implied term of Mr Rutherford’s contract of employment that “in order to be entitled to be considered for an award under the bonus scheme, an eligible participant has to be employed by and/or under notice of termination of their employment (howsoever given) as at the date of payment of any award”.

Decision

The High Court refused to imply such a term. Amongst the reasons given, the High Court stated the implied term was not necessary in order for the contract to operate satisfactorily. Moreover, the proposed term was “manifestly unreasonable” as it would, for example, permit Seymour Pierce to dismiss an employee the day before the bonus was distributed solely to avoid paying that bonus.

Since Seymour Pierce had failed to consider whether to exercise its discretion to make the bonus payment, the Court put itself in Seymour Pierce’s position and held that if Seymour Pierce had exercised its discretion reasonably, Mr Rutherford would have been entitled to the bonus. This was despite Seymour Pierce producing evidence that most, though not all, recent leavers had not been paid a bonus if they were dismissed or resigned after certain dates. The Court considered that Mr Rutherford had, contrary to the assertions of his former employer, performed well and allegations of poor performance were unsupported. The Court put itself in the shoes of a reasonable employer and awarded £70,000, which was between the upper and lower limits of the bonus entitlement identified by the Court.

Planning points

This situation could probably have been avoided had there been clear wording in the employment contract or bonus scheme covering the relevant point. Indeed, later contracts entered into between Seymour Pierce and other employees contained express provisions relating to bonus entitlement and termination of employment. While most bonus schemes (or share schemes, which may well be affected by similar law) do now have relevant clauses in them covering this very point (often extending the requirement so that employees cannot receive a bonus even if they are serving notice), this case is a harsh reminder to employers to check that what is assumed (for example, in a scheme that purports to be wholly discretionary) is still set out clearly. Although had the employee in this case been underperforming before his dismissal, it seems reasonably clear the Court would not have awarded a payment, an employer may not wish to rely on this subjective assessment at the relevant time. An express clause covering leavers is better cover – provided, that is, employees are prepared to agree to it.

This article first appeared in Law-Now, CMS Cameron McKenna's free online information service, and has been reproduced with their permission. For more information about Law-Now, please go to www.law-now.com.

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