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Global employment briefing: Switzerland, June 2018

  • Switzerland
  • Employment law

12-06-2018

Employers should review their employment contracts after two landmark court decisions

In two landmark decisions, the Federal Tribunal has put an end to debate about the validity of certain clauses in employment contracts. The decisions require a review of some clauses in existing employment contracts and employment contract templates.

Use of arbitration in employment disputes

In the first of the two recent decisions (FTD 4A_7/2018 of 18 April 2018), the Federal Tribunal analysed in detail whether and to what extent employment contracts can validly require the parties to resolve their disputes through an arbitration process.

By way of background, Swiss law prohibits the use of jurisdiction clauses in relation to employment matters before a dispute has arisen ie clauses that purport to specify which courts or other bodies may adjudicate on a dispute. The Federal Tribunal has now confirmed that this restriction applies only to state court proceedings. It is therefore possible to choose arbitration to resolve employment disputes at any time, including before a dispute arises.

The Federal Tribunal further clarified that the arbitrability of employment matters is limited to non-mandatory rights and obligations which the parties can freely dispose of. Mandatory rights and obligations on the other hand, such as unfair dismissal claims, are subject to state court litigation.

A controversial question among legal scholars has been whether two parties with a seat/residence in Switzerland may choose international arbitration for employment matters, thereby opting for the broader scope of arbitrability, given that international arbitration is possible with regard to any monetary claim arising from an employment relationship. The Federal Tribunal denied this possibility.

We recommend reviewing arbitration clauses in employment contracts in accordance with the new jurisprudence of the Federal Tribunal.

Contractual penalty and disciplinary action

In the second of the two landmark decisions, FTD 4A_579/2017 of 7 May 2018, the Federal Supreme Court considered the use of contractual penalties to sanction contract violations, including non-competition and confidentiality obligations.

The disputed contract clause stated that “in the event of any violation of contractual obligations, in particular of the non-competition or confidentiality obligation, the employee must pay a contractual penalty of CHF 50’000 per contract violation”.

The Federal Tribunal pointed out that the employee’s liabilities provided for by Art. 321e Swiss Code of Obligations may not be increased unilaterally or by mutual agreement. Therefore, contractual penalties must be carefully analysed to ensure they are aimed at compensating the employer for damage resulting from negligent or wilful misconduct, rather than simply punishing the employee. A contractual penalty which is payable regardless of fault is null and void, as is a contractual penalty which is payable irrespective of the damage incurred by the employer, or that exceeds the actual damage.

While it is generally possible to apply contractual penalties as a disciplinary sanction, the Federal Tribunal specified that

(i) the action/omission to be sanctioned must be clearly defined, and
(ii) the amount of the penalty must be adequate and proportionate in relation to the misconduct,

The court held that the disputed contract clause cited above increased the employee’s liability in violation of the law, did not apply to specified actions/omission, and was, in addition, disproportionate. Therefore, the entire contract clause was considered to be null and void, and not capable of being reduced in scope to render it valid.

In the light of this judgment, contract clauses providing for contractual penalties or liquidated damages should be reviewed and, if necessary, adapted.

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