Legal News June 2010
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Dear clients and business friends
Bonus payments to top managers and other members of management are a controversial issue that, in the meantime, has become not
only a topic of public but also of political discussion. With the "Rip-Off Initiative" or the "Bonus Tax", there are concrete
regulatory plans in this regard on the agenda of the Federal parliament. In addition, efforts are also being made at international
level to prevent excessive bonuses by means of legislation. It remains to be seen what result will come out of these endeavours.
How are bonus promises and bonus pay-ments to be classified from a legal point of view? Are they voluntary or are they
contractually payable claims? Can a bonus be reduced or even cancelled altogether? If necessary, how can the voluntary character
of a bonus payment be secured from the point of view of the employer? These and other questions are discussed in this edition of Legal News.
Daniel Bachmann,
Attorney-at-law, Partner, Legal Services
daniel.bachmann@ch.ey.com
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Bonus payments in employment
Helga Mesaros, attorney-at-law, Legal Services, helga.mesaros@ch.ey.com
Print version (PDF 142 kB)
1. Expression
The expression "bonus" in connection with remuneration in employment is not legally defined. The term comes from the Anglo-Saxon
world and is used in general language for every kind of remuneration in employment that does not represent a fixed salary and is paid out
as a reward for work performed as well as an incentive for future work. The kind of remuneration it represents in each individual case is
identified by interpretation of the relevant agreement in the employment contract. A careful formulation of the bonus agreement is
therefore advisable.
2. Forms of appearance
A bonus can be structured so that it is discretionary or non-discretionary. In the case of discretionary bonuses, the level cannot
be objectively calculated. It lies within the sole discretion of the employer to decide on paying it out and the amount involved. On
the other hand, non-discretionary bonuses can be objectively calculated; if certain criteria defined in the bonus agreement are fulfilled,
the bonus has to be paid.
Bonuses can be comprised of cash payments, payments in kind or both. In practice, common payments in kind are (employee) shares
and/or options.
Depending on the specific manner in which they are structured, cash and/or payments in kind can represent salary in the sense of a
variable salary for performance, a share of a company's profits, piecework pay, a commission or a gratuity in the sense of article
322d CO. Particularly the demarcation between a variable performance salary and a gratuity gives rise to discussion in practice.
There are numerous mixed forms which include various types of cash payment as well as other combinations between cash and payments in
kind, none of which make the legal qualification of the bonus a simple matter.
Furthermore, the bonus can be linked to certain conditions. Here again, those conditions can be discretionary or non-discretionary.
3. A salary claim or a voluntary payment?
Article 319 para. 1 CO defines that compensation paid out for work performed is salary. On the other hand, a gratuity is an exceptional
payment on special occasions and is only contractually payable if it has been agreed accordingly (article 322d CO). The legal
character of the bonus - salary or gratuity - is therefore decisive.
In practice, discretionary bonus payments are often equated with a gratuity in the sense of article 322d CO. With this form, the employer
has a very far-reaching degree of discretion and can make not only the payment but also the level of bonuses dependent upon conditions
which are not covered by employment law. There is usually no imperative equal treatment between the employees. Furthermore, gratuities
are payments made accessory to the salary, i.e. in addition to the salary. The Federal Court has determined that bonus payments which
are regularly at the same level or higher than the basic annual salary are no longer to be considered accessory but as salary
(BGE 131 III 621). In the case of lower salaries, smaller percentile bonus payments are sufficient to give effect to the
salary character of regular payment.
If merely the level of the bonus (gratuity), but not payment of it, is discretionary, the employer can only define the level.
A gratuity agreement can make payment dependent upon conditions such as the employment still being intact without notice of termination
having been tendered, etc. Unless otherwise agreed, there is no pro rata claim if the employment arrangements come to an end. On the
other hand, a bonus which has the character of salary is payable pro rata when the employment ends.
Many employers make the bonus agreement subject to discretionary payment. The existence, or non-existence, of that kind of
reservation can give rise to uncertainties.
If the bonus is not expressly declared to be of discretionary nature, the Federal Court and prevailing doctrine assume that a bonus
in the sense of a gratuity that has been paid out three years in succession without reserve must be deemed to be agreed under the
principle of good faith, even if it was originally paid out as a voluntary and discretionary payment (BGE 129 III 278).
If, in those three years, varying amounts were paid, the bonus is deemed to be payable under the same principle, but the level must be
determined by the court (BGE 131 III 615 ff).
If, on the other hand, agreement is reached that a bonus is subject to discretionary payment, it is advisable to record this not
only in the employment contract but also on every bonus statement or to make the employee aware of it by means of a separate letter.
Despite subjecting a bonus to discretionary payment, the Federal Court has decided that a bonus that has been paid out for years, even
though the preconditions for it were not fulfilled (e.g. poor performance of the employee or poor course of business) must be deemed to
be a component of the salary because the reservation of discretionary payment has become meaningless. Even discretionary payments that
have been made for decades can therefore, according to the Federal Court, become components of salary (BGE 129 III 281).
The doctrines on this jurisprudence are wide apart.
If one follows this jurisprudence decreed by the highest judges, one must assume that a three-year, uninterrupted payment of (high)
bonuses must be regarded as a regular payment and therefore the employer can only reduce or cancel a bonus of that kind by means of
a dismissal with the option of altered conditions of employment.
If a bonus is to be treated as a component of salary, it has to be definable and measurable. The conditions and the measurement
of those bonus payments must be contractually recorded.
Insuring the bonus in the 2nd pillar or under the accident or sickness compensation coverage also leads to the assumption that
the bonuses are to be classified as (variable) salary and not as gratuities.
4. Conclusion
The term "bonus" which has drawn so much attention in the recent past is so diverse that it is hardly comprehensible and has to
be qualified against the background of each specific case. Even if a bonus is subjected to discretionary payment, the employer can risk
having to pay it out. The topic will certainly continue to be of effect in the media but will keep the courts busy as well.
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Note: The Legal News provides an overview of new legal developments. The content does not represent any legal advice.
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