News - Switzerland

Switzerland - May 2013

The Swiss Federal Supreme Court rules that bonuses for high earners can be subject to forfeiture

The Swiss Federal Supreme Court has held that bonus payments to high earning employees should be treated as discretionary compensation with the result that a forfeiture clause.is enforceable.

Background

The issue is whether a bonus payment qualifies as variable salary or as discretionary compensation. Swiss employment law does not explicitly make reference to bonus payments. Therefore, the answer has historically been determined by the Court on each case's facts by reference to case law.

The distinction between variable salary and discretionary compensation is important. This is because a bonus that qualifies as variable salary cannot be subject to a forfeiture clause. For example, where an employment is terminated before the end of the period over which the bonus is earned, the employee is entitled to receive an amount of variable salary on a pro rata basis. On the other hand, where a bonus is deemed to be discretionary compensation, no entitlement accrues and a forfeiture clause is enforceable.

The Courts have been conscious of the need to provide protection to employees in relation to their salary. Pursuant to the case law developed by the Federal Supreme Court any bonus payment that exceeds the total salary received by the employee from the employer is qualified as a salary component. This rule is referred to as the “accessory nature” of a bonus payment, meaning that a bonus payment must be “accessory” to the salary of the employee in order to be qualified as a discretionary bonus. This rule intends to grant the employee a salary protection and is socially motivated.

Where the bonus exceeds the total amount of compensation otherwise paid to the employee it is fully or partly considered to be a salary component and not "accessory" in nature.

The case in question

An employee at a Swiss bank was granted a deferred award subject to forfeiture in the event of the termination of the employment in addition to a high salary and a cash bonus of almost 2 million Swiss Francs. The employee terminated the employment and claimed that the portion of the deferred award forfeitable under the terms of the award, qualified as a salary component (and was not discretionary compensation). Accordingly, the forfeiture provision was not enforceable. The Federal Supreme Court, however, rejected his claim. Instead, it ruled that the deferred award was a discretionary bonus and that the forfeiture clause was valid.

The Court's view was that the case law developed with respect to the accessory nature of a bonus payment should no longer apply in the case of employees with very high salaries since in its view these employees do not need the protection offered by the Court.

Thus, if, for example, an employee's salary far exceeds the amount required to cover his/her reasonable living costs, the bonus payment may still be a discretionary bonus (with the result that a forfeiture clause is enforceable) regardless of the ratio between the fixed salary and the bonus.

Commentary

In the light of this ruling, employers are well advised to obtain legal advice in relation to the drafting of bonus plans.

Resources

Decision of the Federal Supreme Court of February 26, 2013; 4C_520/2012.

For further information or to discuss any of the issues raised, please contact Walter H. Boss or Stefanie Monge on +41 44 220 1212 at Poledna Boss Kurer, Zurich - www.pbklaw.ch

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