The Swiss Federal Supreme Court has recently changed its established case law on bonuses, making it more difficult for certain employees to claim a pro rata bonus if their employment ends during the year.
According to the Swiss Federal Supreme Court’s existing case law, an employee can have an inalienable pro rata bonus claim if the employment terminates in the course of the year even if the parties have explicitly excluded such a pro rata bonus claim in their agreement. This is the case if the bonus qualifies as a so-calledsalary component, in which case the bonus will in particular also have to be taken into consideration when calculating other claims such as overtime claims, the compensation of accrued (but untaken) vacation time at the end of the employment or the statutory penalty that is due in case of an abusive termination or unjustified dismissal for cause
According to existing case law, a bonus qualifies as a salary component in two instances:
- If the employer no longer has any margin of discretionin fixing the bonus amount (e.g. because the bonus can be calculated based on objective factors); or
- If the bonus can no longer be considered to constitute anancillary payment (i.e. a payment which is ancillary to the fixed salary).
In regard to the latter criterion, case law does not define a specific ratio between the bonus and the fixed salary which is decisive in determining whether the variable payment is ancillary. If, however, the bonus regularly exceeds the fixed salary, the bonus inevitably qualifies as a salary component.
If a pro rata bonus is due, its amount has to be set by the employerin good faith. This means that only the criteria that have been agreed upon or, in the absence of an agreement, criteria that the employee in good faith could expect to be considered can influence the bonus amount. In case of a discretionary bonus that does not qualify as a salary component, case law accepts that the bonus can be reduced by one third to one half if notice of termination has been given at the time when the bonus has to be paid. Whether such a reduction is also permissible for a bonus that qualifies as a salary component has not yet been decided. In our opinion, such a reduction should be possible because a bonus does not just compensate the employee for good performance but also incentivises the employee for the future. In case of a termination, an incentive for the future is no longer necessary.
New Exception for Very High Salaries
In a decision of August 11, 2015, the Swiss Federal Supreme Court defined an exception to its prior case law. More specifically, the Federal Supreme Court decided that a discretionary bonus never qualifies as a salary component if the employee enjoys a very high income, which is defined as an amount that corresponds tofive times the Swiss median salary. This currently means that for an employee who earns more than roughly CHF 370'000 the above-mentioned criterion (ii) is irrelevant. For such employees, a bonus will therefore now only qualify as a salary component if the employer no longer has any margin of discretion in fixing the bonus amount.
In a more recent decision of April 12, 2016, the Swiss Federal Supreme Court now has further clarified how the exception for very high incomes is calculated. According to this latest decision, it is irrelevant under which title, under which designation and for which period a payment is made in determining whether or not the employee enjoys a very high salary. Rather, the Federal Supreme Court counts any and all income which the employee received in the year in which the employment terminates. If the year is not a complete year, the threshold is reduced on a pro rata basis.
In the specific case at hand, the employee in question received a fixed salary of CHF 239,200 plus an additional CHF 244'480 as a bonus, of which CHF 214,480 was explicitly paid as a bonus for the previous fiscal year. Before the Federal Supreme Court’s most recent decision, the portion attributed to the previous fiscal year would not have been taken into consideration when assessing whether the threshold of five times the median salary was met. In the present case, however, the Swiss Federal Supreme Court found that the individual had a higher income than five times the Swiss median salary and that, therefore, the employee could not argue that the bonus was not ancillary to the fixed salary.
Whether equity payments, payments that the employee receives for accrued (but untaken) vacation days or voluntary severance payments will count against the threshold is still an open question. Nevertheless, based on this new case law, employers might in some cases be well advised to ensure that the threshold of five median salaries is exceeded. This is true because the payment that is needed to fill the gap between the actual income and the threshold might be much smaller than the pro rata bonus to which the employee might be entitled. By making a relatively small discretionary bonus payment during the notice period, the employer may thus in some cases be able to avoid the payment of a possibly much higher pro rata bonus.