Recent Developments Regarding Bonus Entitlement

 
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At a time when high salaries and bonuses are subject of criticisms, the Swiss Supreme Court has clarified the conditions under which an employee may assert a right to a bonus.

1 OVERVIEW

1.1 Legal characterization of bonuses

Swiss law does not contain any provision that specifically defines and deals with the question of bonuses. Depending upon the agreement between the parties, as well as the nature and circumstances of the payment, a bonus will be legally defined either as a gratuity within the meaning of Art. 322d of the Code of Obligations (hereinafter: "CO"), or as a part of a salary within the meaning of Art. 322 to 322b CO. The legal characterization of the bonus is important, since the legal regime applicable to gratuities is much more flexible than the one applicable to the salary components, which are subject to numerous protective rules regulations.

Thus, in case of beginning or end of the employment relationship during the course of a year, a bonus, if characterized as a part of the salary, will have to be paid pro rata temporis. If the bonus is characterized as a gratuity, it has to be paid pro rata temporis only if so agreed. The payment of a bonus characterized as a salary component shall not be subject to the requirement that the employee is still working in the company at the time of the payment, whereas payment of a bonus characterized as a gratuity may be subject to such a condition. The payment of gratuities may also validly be subject to the condition that the employment relationship has not been terminated. In other words, an employee still working in the company at the time of notification of bonuses, but whose employment contract has already been terminated, may legally be denied payment of any gratuity for the current year.

1.2 Criteria for the characterization of Bonuses

In order to characterize a bonus as a salary or as a gratuity, one needs to go beyond the use of either term by an employer in the contract, staff regulations, or any other document. One needs to take into account the distinguishing criteria developed by the case law.

The first distinguishing criterion is linked to the employer's discretionary power. A gratuity requires a certain degree of discretion. If no discretion is left to the employer with regard to the principle and the amount of a bonus, it will be characterized as salary. Hence, a remuneration of which amount and due date of payment are unconditionally set in advance must be regarded as salary. Such is the case with the thirteenth month's wage and any other similar payment entirely determined by contract. When the amount is not set in advance, but depends on a pre-determined arithmetical rule, leaving the employer no discretion, it is also considered as a salary component which, depending on the circumstances, may be governed by Art. 322a CO (share of the operating profit) or by Art. 322b CO (commission). That is what happens, for example, when an employment contract provides that the employee will be paid a fixed bonus amounting to 15% of the fees received by a company or 3% of the income of the assets under management that the employee is in charge of. This remuneration constitutes a salary component because the employer has lost all discretionary power with regard to the decision of granting this payment.

The second distinguishing criterion is linked to the incidental nature of the payment. This criterion seeks to prevent employers from classifying as gratuities amounts, which in fact constitute parts of an employee's salary. This risk exists whenever the bonus appears to be particularly high compared to the employee's fixed salary. The bonus must consequently remain...

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