Switzerland: Swiss Supreme Court Defines "Very High Remuneration" And Sets A Framework For Managers' Remuneration

Summary

In a recent noteworthy decision, the Swiss Supreme Court (the "Supreme Court") has ruled that a remuneration which exceeds five times the Swiss median salary is considered as a "very high remuneration" and as such does not deserve the protection generally granted by Swiss employment legislation.

Facts

The plaintiff (the "Employee") was a managing director of a large Swiss bank (the "Bank"). In mid 2009, he resigned from his position to join another financial establishment. At the time of his resignation, the Employee's remuneration was composed of a fixed annual base salary of CHF 300,000 (USD 310K approx.) with a two-fold bonus incentive scheme composed of Incentive Share Units (ISU) and a Cash Retention Award (CRA). The bonus incentive scheme provided for a claw back clause (the "Claw Back Clause") entitling the Bank to claw back pro rata the cash bonus (CRA) if the Employee were to resign (the "Clawback Event") within a two year period as of January 2009 (the "Claw Back Period").

At the end of February 2009, the Employee received a bonus payment of CHF 501,719 (USD 520K approx.) in the form of shares (ISU) and a cash bonus payment (CRA) of CHF 848,242 (USD 880K approx.). With the payment, the Bank emphasized that the bonus was paid at the Bank's sole discretion.

At the beginning of March 2009, i.e., a few days after the bonus payment, the Employee notified the Bank that he was resigning from his job, effective at the end of June 2009. The Bank released the Employee from his obligation to work and informed him of his contractual (pro rata) repayment obligation amounting to CHF 636,210.95 (USD 660K approx.) (due to the triggering of the Clawback Event). As the Employee failed to comply with the request for repayment, the Bank exercised the right of set off by debiting the amount of CHF 636,210.95 (USD 660K approx.) from the Employee's account held at the Bank.

The Employee brought an action before the local court claiming, inter alia, the payment of CHF 636,210.95 (USD 660K approx.) representing the amount set off by the Bank. The Employee argued that the bonus (the "Disputed Bonus") should be considered and treated as salary (as opposed to a gratuity) and that, as such, it was not "recoverable" by the Bank. The lower court found that the Disputed Bonus actually qualified as a variable salary and as such was due and payable. On appeal lodged by the Bank, the Appellate Court partially reversed the lower court's decision: it ruled that contractual freedom prevails with respect to the portion of annual remuneration beyond CHF 500,000 (USD 518K approx.), in the meaning that the employer is free to grant a gratuity (payable under certain conditions) for that portion without running the risk to see the gratuity requalified as salary.

The Bank appealed to the Swiss Supreme Court which overruled the Appellate Court's decision.

The Supreme Court's decision

The main question at issue was whether the Disputed Bonus qualified as part of the salary due to the employee (the employee's position) or, in contrast, as a gratuity (employer's position).

The Supreme Court began by stating that Swiss law does not contain any legal provision defining bonus. Whether bonus qualifies as salary or as a (discretionary) gratuity is crucial because the gratuity regime is substantially more flexible than the regime applicable to salary.

The Supreme Court continued its analysis by saying that the first point to clarify is to establish whether a bonus is determined or determinable (which is the case when the remuneration does no longer depend on the employer's assessment). If so, the bonus qualifies as a variable salary component and the employee is entitled thereto. In contrast, if the bonus is not determined (or not objectively determinable), then the bonus qualifies, in principle, as a gratuity and as such, it is at the employer's discretion.

Yet, the Supreme Court went on, this principle suffers exceptions: according to case law, if an undetermined bonus is substantial compared to the annual salary – equivalent to or even higher than the annual salary –, and has been paid regularly, then it qualifies as a (variable) salary even though the employer has reserved its discretionary character. Indeed, to qualify as a (discretionary) gratuity, the bonus must be secondary to the salary (the so-called "secondary criterion").

Referring to recent case law, the Supreme Court further explained that no such exception applies if the employee receives a very high remuneration. In such case, the (undetermined) bonus always qualifies as gratuity.

The Supreme Court then turned to the definition of "very high remuneration". First, it set out the following principles:

• the threshold of a "very high remuneration" must be fixed with due consideration to the employee's total annual remuneration (base salary and bonus) in the relevant year;
• if said total remuneration exceeds the threshold of a "very high salary", then the undetermined bonus always qualifies as a gratuity. In that situation, there is no place for a requalification of the bonus into salary (the "secondary criterion" does not apply);

Having set out these principles, the Supreme Court ruled that a "very high remuneration" is adequately defined as being a remuneration which exceeds five times the Swiss median salary (all industries in the private sector included). When the employee receives such "very high remuneration", then the bonus qualifies as a gratuity, at the discretion of the employer. In its reasoning, the Supreme Court stressed that when an employee receives a "very high remuneration", there is no need to grant any protection by restricting the parties' contractual freedom.

In the case at issue, the Employee's total remuneration exceeded the threshold set for a "very high salary".  Consequently, the Supreme Court held that the Disputed Bonus qualified as a discretionary gratuity and that the Claw Back Clause was admissible.

Commentary

The decision of the Supreme Court adds to recent case law, establishing that beyond a certain level of remuneration, contractual freedom prevails over the employee's need for protection as traditionally granted by employment legislation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.