Termination costs for high earners in Switzerland: new flexibility for employers?

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A recent ruling of the Swiss Federal Supreme court could allow employers in Switzerland greater flexibility in termination packages for some very high earning employees.

Under Swiss law, a bonus which is part of an employee’s variable salary with the meaning of the Swiss Code of Obligations (the “Code”) must be paid to an employee on termination of the employment relationship. Forfeiture, claw-back and deferred vesting clauses will not be enforceable on this type of bonus, and therefore employers in Switzerland must factor these types of bonus into their termination costs.

This rule does not apply to certain discretionary payments, however, known as “gratifications” or “special remuneration”.  The distinction between a “variable salary” bonus due on termination, and a gratification, is not defined in the Code, however, but via caselaw.  A recent ruling of the Federal Supreme Court has added an important clarification in respect of very high earners.

Variable salary vs gratification: how do you tell the difference?

Caselaw has established, among others, the following guidelines to distinguish between variable salary and a gratification in Switzerland:

• A gratification must be accessory to the base salary: it must be of lesser importance in the context of compensation for the employee. There is no fixed threshold, but gratifications exceeding 50% of the base salary are, in principle, not regarded as accessory and, hence, are requalified as (variable) salary.  
• What does this mean for high earners? Recently, the criterion of the payment being “accessory” has come under scrutiny by the Swiss courts, in particular with regard to employees with a very high overall yearly income. The Federal Supreme Court held that such employees do not require the social protection arising from the “accessory” criterion. If an employee receives a “very high” overall income which substantially exceeds his or her living costs, the amount of the bonus in relation to the base salary can no longer be decisive. An income which exceeds the median wage by five times (currently CHF 371,340) is seen to be “very high”.
• What income should be taken into account in determining whether it meets the threshold of “very high income”? The court ruled this should be actual income received in the respective year in respect of the employment contract, and not for which period of time or for which business year such payments are received by the employee

In the case ruled on by the Federal Supreme Court, as the bonus in cash (for 2007), which was paid out in February 2008, was already more than twice as high as the fivefold median salary in 2008, the employee achieved a very high overall income in 2008. Hence, the voluntarily agreed bonus could not be converted into a variable salary component, and the employer was not obliged to pay it on termination.

What does this mean for employers?

Employers in Switzerland who employ high earners should examine and if necessary redraft their employment contracts and incentive plans, to minimise the chances of a voluntary bonus being requalified into a variable salary component.  This decision provides welcome clarification for these purposes, as well as a powerful new argument for employers in termination negotiations to avoid reclassification of existing bonuses into variable salary in the case of high earners who meet the relevant thresholds.

For further information or to discuss any of the issues raised, please contact Marco Toni on +41 43 434 67 15, Loyens & Loeff

Resources

Decision of the Federal Supreme Court of Switzerland:

http://www.polyreg.ch/bgeunpub/Jahr_2016/Entscheide_4A_2016/4A.69__2016.html 

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