Case shows need for clear wording in contracts

The recent case of Rutherford v. Seymour Pierce Ltd illustrates that employers need to 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.

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 3 months.

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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’.

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.

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.