Update on the "Lex Minder" incorporation into the Swiss Code of Obligations – What does it mean for Termination Agreements of C-level employees in practice?

Update on the "Lex Minder" incorporation into the Swiss Code of Obligations – What does it mean for Termination Agreements of C-level employees in practice?

The aim of this initiative was to moderate the remunerations, considered excessive, paid to the top management of listed companies by prohibiting certain forms of remuneration, including severance payments triggered by the termination of an employment agreement.

After being incorporated into the Swiss Federal Constitution (Art. 95 para. 3 Cst) and then detailed in the Ordinance against Excessive Remuneration in Stock Listed Companies (Art. 20s OER), the prohibition on so-called severance payment is now legislated in the Swiss Code of Obligations since January 1, 2023 (Art. 735c CO).

Initiative populaire fédérale «Contre les rémunérations abusives»

Under this new disposition, severance payments for C-level employees of stock listed companies remain prohibited.

Who is affected by the law?

The prohibition on severance payments applies to Swiss companies listed on stock exchanges in Switzerland or abroad (Art. 95 para. 3 Cst).

Severance payments are prohibited for current and former governing officers, i.e. members of the Board of Directors, the Executive Board and the Advisory Board or their close relatives. Employees who occupy the hierarchical level immediately below the Board of Directors and who report directly to the Board are considered members of the Executive Board.

Impact on Termination Agreements?

The Swiss Code of Obligations explicitly and clearly states that contractually agreed severance payments and severance payments as per the company's articles of association are prohibited.

What about severance payments in Termination Agreements?

The provision does not in itself prevent companies from entering into Termination Agreements with their employees. In fact, the legitimate interest of both the employer and the employee to terminate the employment relationship by means of a Termination Agreement has been and still is recognized; both parties may have a legitimate interest to settle disagreements and avoid a costly dispute.

According to most of the scholars the compensation provided for in the Termination Agreement and paid by the employer at the end of the employment relationship in order to settle any claims of the employee is not prohibited under Art. 20 OER (For example : BSK VergüV – PÖSCHEL INES, Art. 20 VergüV N 50 ; CR CO II – BAHAR RASHID, Art. 20 ORAb N 27.)

If the compensation provided for in the Termination Agreement is not prohibited, the question remains as to the maximum amount that this compensation can reach in order not to be considered as a prohibited severance payment.

According to the Federal Supreme Court, the amount provided for in the Termination Agreement is limited by the notion of "equal value". A weighing of interests must be carried out on a case-by-case basis to assess whether the mutual claims that are waived are of approximately equal value (TF 4C.390/2005 du 2.5.2006, c. 3.1.).

What is considered as "equal value"?

As stated by the Federal Supreme Court, this depends on the case at hand.

Where the purpose of the Termination Agreement is to avoid a potential dispute or to settle a claim, the disadvantage of an immediate agreed payment will have to be weighed against the risk of a potentially higher award.

In other words, for the payment made under the Termination Agreement not to be considered excessive and prohibited, the company will have to determine the amount it should agree to pay to avoid incurring the costs and expenses of litigation and the risk of being ordered to pay a higher amount (EDGAR PHILIPPIN, La mise en œuvre de l’initiative « contre les rémunérations abusives », SJ 2014 II p. 261.)

This evaluation must be made diligently. While certain factors must be estimated, it is not a preclusion for stock listed companies from entering into fair and balanced Termination Agreements with C-level employees.

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