We have a senior employee who is underperforming and we want him to go right away. We plan to pay him in lieu of his notice period, but he would be entitled to a significant bonus payment upon attaining one year's service, which would fall due during his notice period. We don't want to have to pay the bonus - do we have to?
When an employment relationship has broken down, an employer is often keen to get the employee out of the business as soon as possible. Whether or not an employer can lawfully do so, however, depends upon the terms of the contract of employment. The contract will specify the notice to be given by either party to the other to bring the employment to an end. An employer has no right to summarily terminate the employment by making a payment in lieu of notice unless that right is expressly set out in the contract.
You need to consider the terms of the individual's contract. If it does not contain a term reserving the right to make a payment in lieu of notice (commonly referred to as a PILON), and you terminate the contract immediately, you will be in breach of contract - even if you make a payment in lieu of notice. In those circumstances the employee could claim damages, which would include the amount of bonus he would have received had he worked out his notice period.
Where an employer wants an employee to leave immediately, but the contract does not contain a PILON, the alternative is often to put the employee on "garden leave", so that he or she is not required to attend work during the notice period. This course of action is useful where it is important for the employer to keep the individual away from clients and contacts to allow the employee's replacement to cement relationships with them. However, the departing employee remains employed during any period of garden leave and would still be entitled to receive the bonus payment when it falls due, so this would not solve the bonus issue in your case.
If the employee's contract does contain a PILON, the payment this individual is legally entitled to receive will depend upon the wording of the contract, and is not governed by any particular employment legislation. The first port of call will be the PILON clause itself. If this clause provides that payment will be made in lieu of salary and bonus for the notice period, then the employee will be entitled to his bonus payment. If it limits any such payment to basic salary only, then you will not have to pay the bonus.
If, however, the PILON clause is silent as to what the payment should comprise (for example, if it simply reserves the right to make a payment in lieu of notice), calculating what is due in respect of the notice period may prove more difficult. In those circumstances it is necessary to look at the other terms of the contract. It is common for bonus clauses or other contractual documents relating to bonus to include a term that employees are only entitled to receive a bonus if they are still in employment at the time it falls due. If that is the case, the employer need not pay out a bonus to the departing employee, provided their employment is terminated before the payment date. It will, of course, be a different story if there is a term pro-rating bonuses for departing employees.
Bear in mind that the employee is likely to put up a fight, especially where his employment is ending suddenly and will deprive him of a significant bonus payment. You will therefore need to be certain of the contractual position before going ahead with the termination. It is also worth remembering that the above approach relates only to the contractual position. Although he will not be able to claim unfair dismissal if he does not have one year's service, he may seek to bring other claims if he feels that there is an element of discrimination in your decision to dismiss or that he is being penalised for whistleblowing.
Top tips for drafting PILON clauses
- Employers often want to terminate an employee's contract quickly when difficulties arise. When drafting employment contracts, it is advisable to consider incorporating a PILON clause, to allow termination to be effected immediately without the employer breaching the contract.
- It is important to properly define what is payable under a PILON clause, whether salary only, salary and benefits, or salary and bonus and benefits. This is particularly important where a bonus forms a large part of an employee's remuneration.
- Employers should make sure that any bonus and PILON clauses are consistent, to avoid any future disputes about what is payable upon termination. Bonus clauses should also set out clearly the circumstances in which bonus will be paid, including where employment ends partway through a bonus year, so that there can be no room for doubt.
- In the case of more senior employees who may have longer notice periods and higher salaries, employers may wish to make provision for payment in lieu of notice by instalments, to avoid having to make a lump sum payout upon termination, which may be a significant outlay.