Switzerland Update: Bonus and reservations

This year’s “bonus season” is drawing to a close. Especially in a Corona year, employees are happy about a welcome extra payment or angry if the bonus was below expectations. Employers, on the other hand, may wonder whether they can forego or at least reduce a bonus that has been regularly awarded in the past. 

In a decision of 3 March 2021, the Federal Supreme Court clarified that a bonus contractually agreed as discretionary does not become an enforceable claim even if it was paid without reservation over several years.

Legal classification of bonus payments

A bonus is a variable remuneration that is often granted in addition to the fixed basic salary, but is not defined in the law. Bonuses can be divided into three categories from a legal perspective:

Variable salary (entitlement to grant and amount of bonus);

Atypical gratuity (entitlement to grant of bonus at employer’s discretion regarding amount); and

Genuine gratuity (no entitlement).

The decisive factors for the legal qualification of a bonus are not (possibly incorrect) designations in the contract or (bonus-) regulations, but the actual agreements between the parties and the actual practice. The criteria of discretion, regularity and “accessoriness” are decisive. 

In the following, the particular aspect of reservations regarding the discretionary nature of a bonus relating to the criteria of discretion and regularity will be explained, which is why the other criteria for the qualification of a bonus will not be further discussed.

Regular bonus payments without reservation may give rise to a claim

According to the established case law of the Federal Supreme Court, a claim for payment of a bonus arises, at least in principle, if it has previously been paid regularly and without reservation as to its discretionary nature for at least three consecutive years. In such cases, the practice assumes a tacit agreement between the parties that the employee should receive a bonus.

This tacit agreement, in view of the usually fluctuating bonus amounts, regularly only concerns the principle that the employee shall receive a bonus , while the employer can still determine the amount at its (non-arbitrary) discretion (atypical gratuity).

In their decisions, some courts even considered cases to be covered by the aforementioned Federal Supreme Court case law, in which the original employment contract or the bonus regulations clearly state that the bonus is paid at the employer’s discretion or voluntarily. This view is rightly criticised by parts of the doctrine.

According to the Federal Supreme Court, a contractual reservation is sufficient

The Federal Supreme Court’s decision 4A_280/2020 of 3 March 2021 (French) dealt with a case in which an employee had resigned and subsequently demanded a bonus from the employer. 

According to the employment contract, a target bonus of 10% of the base salary had been agreed, which was to be based on the employee’s performance and the achievement of targets, as well as on the group’s business performance or the achievement of corresponding targets. Reference was made to the corresponding bonus plan of the employer.

The bonus plan, in turn, made several references to the employer’s sole discretion regarding the financing of the plan, the employee’s participation, and the grant and amount of the bonus. It also explicitly stated that bonus payments do not constitute a guarantee or indication of future bonus payments.

The Federal Supreme Court rightly qualified this bonus as a (genuine) gratuity to which there is no entitlement. It explicitly stated that the aforementioned rule of the emergence of a bonus claim in the case of unconditional payments during at least three years does not apply to cases in which the parties had already contractually reserved the employer’s discretion with regard to both the basis and amount of the bonus (E. 5.3). 

In doing so, the Federal Supreme Court agreed with the cantonal court, which had stated that the employee, in view of his knowledge of the employment contract and the bonus plan with reservations to the discretionary nature of the bonus, could not have assumed in good faith that the bonus had become compulsory as a result of the years of payment without again reserving the employer’s discretion (E. 5.1).

Decades of reservations can become empty words

Even in the event that reservations of the employer’s discretion are made when bonuses are paid, according to the Federal Supreme Court’s practice, the constant repetition of the reservation for decades can lead to the reservation becoming empty words from the employee’s point of view if the employer’s entire conduct shows that they feel obliged to pay a bonus. The condition for this assumption is that during this time the employer would have had reason not to pay the bonus (e.g. in the case of bad business or insufficient work performance) and did so anyway.

Conclusion

If a bonus is to be at the employer’s discretion, we recommend to make explicit reference to this both in agreements/regulations and in any grant. However, even apart from the lack of reservations, there are many other circumstances from which a bonus claim can arise, despite the fact that the employer may not even be aware of this. From the employer’s point of view, we recommend to have the legal implications of a bonus practice clarified in advance in order to avoid a rude awakening in court later on. 

By Marc Ph. Prinz and Gian Geel, Vischer, Switzerland, a Transatlantic Law International Affiliated Firm.

For further information or for any assistance please contact switzerlandlabor@transatlanticlaw.com

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