Legal

What to consider when drafting contractual bonus clauses

7 Jan 2019 By Alison Downie

How can employers make sure any contractual bonus clauses they create are unambiguous? Alison Downie reports in light of a recent Court of Appeal judgment

JLT Speciality Limited v James Craven centred on the effective date of the defendant’s resignation, interpretation of contract wording and whether the clause requiring repayment of the full amount of the bonus was an unlawful penalty and unenforceable (though the last point was not pursued at hearing). 

The judgment made short shrift of some of Craven’s defence arguments and contains some useful points on interpretation of contracts.

James Craven joined JLT under an executive employment agreement dated 5 May 2005. In March 2012, that employment agreement was varied by a written addendum. Craven’s employment would continue (unless terminated earlier under the agreement) until ended by 52 weeks’ written notice by either party, but notice by Craven could not expire before 31 December 2016. 

The agreement stated that he would receive a bonus advance of £500,000, but this was backed by a repayment clause which expressly stated that if Craven resigned on or before 31 December 2016 the advance would be repayable in full.

On 23 September 2015, Craven submitted his notice of resignation with effect ‘from today’s date’. There followed correspondence between them on the termination date, which was used by Craven’s representatives to argue the bonus was not repayable. 

On 29 September 2015, JLT wrote that the resignation was accepted and Craven’s employment would end on 1 January 2017. On 5 August 2016, JLT wrote that the final day of employment would be 31 December 2016.

On 25 August 2016, Craven wrote he would stick with his 12-month notice period. JLT replied his current notice period was longer than 12 months, so the final day of his employment would be 31 December 2016. 

Craven did not dispute this. JLT wrote to him again confirming his contract would cease on 31 December 2016, and sought repayment of the full bonus.

The Court of Appeal granted JLT summary judgment, making short work of Craven’s legal arguments to retain the bonus. 

The court rejected Craven’s argument that JLT’s letter of 29 September, stating his employment would end on 1 January 2017, was an accepted variation of contract. The £500,000 bonus was repayable if his employment ended on or before 31 December 2016, which it had.

Lessons

The implications of the judgment are straightforward: the employer was assisted by reasonably clear and unambiguous language in the addendum clauses and their written clarification (eventually) of the precise termination date. Any employee should carefully consider the fine detail of such clauses and ensure they meet any conditions for non-repayment, if they wish to avoid that.

Tips for drafting bonus clauses

  • Use clear and concise language, as for any employment contract generally. Avoid convoluted sentences which may be ambiguous. Use plain English.
  • Decide on the form of bonus you wish to pay – a guaranteed amount or discretionary, wholly or partly? Or a guaranteed minimum amount and conditional amounts on top? For example, it is possible to have a completely discretionary bonus with regards to the amount, time and method of payment. Nevertheless, case law dictates that the discretion must be exercised rationally. Refusing to pay a discretionary bonus arbitrarily would be unlawful.
  • Set out the payment arrangements – paid in one amount or in installments? When? Avoid a precise date for payment – indicate around what period, or by when.
  • Decide whether any target has to be met by the employee or the business before payment, and be clear about it.
  • For a signing-on bonus, include provision for repayment, possibly of part rather than the full amount, if the employee leaves before 12 months or a longer period.
  • State any entitlement if at the time of payment the employee has given notice to end employment, or has left the business. On termination will they be entitled to a pro rata bonus payment, paid after their departure? Is this conditional on the employee abiding by their post termination restrictions?
  • Avoid bonus conditions which could be indirectly discriminatory. Check for direct and indirect discrimination.
  • What happens to the bonus payment if the employee is on garden leave? Not paying it may result in post-termination restrictions falling away with the contract, which should be avoided.
  • Provide that the bonus will continue to be payable where there is a change of control of the business.
  • Do not exclude women on maternity leave from bonus entitlement.

Alison Downie is a partner at Goodman Derrick LLP

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