Switzerland: Federal Supreme Court Clarifies Practice in Connection with Post-Contractual Non-Competition Clauses and Compensation for Non-Competition (BGer 4A_5/2025 from June 26th, 2025) and a Look at a Common Subject of Dispute: Payment of Restricted Stock Units Only if Employment Relationship is Intact
A. Summary of New Ruling in Regard to Practice in Connection with Post-Contractual Non-Competition Clauses and Compensation for Non-Competition
An employee resigned after more than 15 years of service for a Swiss employer that is part of an international corporation. The parties had agreed in writing on a post-contractual non-competition clause and compensation for loss of earnings in the employment contract. This prohibited the employee from taking up a position with a competing company for two years after the end of the employment relationship, as well as from becoming self-employed in a competitive manner for the same duration. Compensation for the duration of the post-contractual non-competition clause was agreed between the parties at 50% of the last salary (excluding bonuses). Such a compensation is not mandatory but can be agreed on by the parties. After the resignation, the employer submitted a separation agreement to the employee, which was intended to cancel the post-contractual non-competition clause and the compensation owed. The separation agreement was not concluded, whereupon the employer terminated the non-competition clause and the compensation in writing. As a result, a legal dispute arose between the parties, and ultimately the Federal Supreme Court had to clarify the following points conclusively with the ruling BGer 4A_5/2025 from June 26th, 2025):
Validity of the Post Contractual Non-Competition Clause in the Absence of Geographical Restrictions
Art. 340 ff. CO states the legal requirements for valid post-contractual non-competition clauses. The legal requirements for a valid post-contractual non-competition clause are, in particular, the agreement being in writing (Art. 340 para. 1 CO), insight into the customer base or into manufacturing and/or trade secrets (Art. 340 para. 2 CO), the existence of a significant possibility of damage (Art. 340 para. 2 CO) with a causal link between access to the customer base or business and/or manufacturing secrets, and an appropriate limitation in terms of location, time, and subject matter (Art. 340a para. 1 CO).
In the present case, the parties had agreed in writing on a post-contractual non-competition clause, but had not applied any geographical restrictions. The employer therefore took the position that the non-competition clause was invalid from the outset. However, the Federal Supreme Court ruled that the meeting of above-mentioned requirements for a valid non-competition clause must be assessed in two steps. First, it must be determined what the parties actually agreed upon or what is to be understood in good faith, and then whether this contractual content was sufficiently recorded in writing. In the present case, the Federal Supreme Court concluded that a geographical restriction to Switzerland was reasonable, as the employer was the Swiss company of the international group. In the absence of sufficiently substantiated objections from the employer as to why the non-competition clause should not cover the whole of Switzerland, the Federal Supreme Court concluded, after assessing all the circumstances, that the written agreement was sufficient to affirm a valid post-contractual non-competition clause covering the entirety of Switzerland after determining the mutual intent of the parties.
Validity of the Non-Competition Clause in the Absence of Geographical Restrictions
In principle, the parties are free to agree to waive the enforcement of a post-contractual non-competition clause. However, since the parties had agreed on a post-contractual non-competition clause including compensation for the waiting period, it had to be clarified whether the unilateral termination of this clause by the employer was lawful. The Federal Supreme Court concluded that unilateral termination of a non-competition clause including compensation for loss of earnings is not possible unless this option has been agreed upon the parties. The Federal Supreme Court therefore ruled that unilateral termination of the non-competition clause in order to avoid paying compensation for loss of earnings is invalid and that the post-contractual non-competition clause remains valid indeed.
Offsetting of Replacement Income from Compensation for Loss of Earnings
The employer demanded in the present case that the employee’s substitute income or any substitute income that was culpably not earned should be offset against the amount of the agreed compensation for loss of earnings. Once again, the Federal Supreme Court did not follow this argument and ruled that in both cases, substitute income may only be offset against the amount of compensation pay owed if this has been agreed between the parties. Without such an agreement, offsetting is excluded, as the agreed upon compensation pay is not intended as compensation for damages, but as compensation for compliance with the non-competition clause.
In summary, this means that great caution is still required when drafting post-contractual non-competition clauses in particular, if they include a compensation. Compliance with the legal requirements and wording of the clause are complex and involve many pitfalls.
B. Subject of Dispute: Payment of Restricted Stock Units Only If Employment Relationship Is Intact
Whether free of charge or at reduced rates, restricted stock units (hereinafter “RSU”) are a common form of employee remuneration in Switzerland. Under this arrangement, an employee is granted shares that he/her receives at a later date, usually subject to contractually agreed on conditions. One of the most common conditions is that the employee must be in an ongoing employment relationship at the time of the actual transfer. A recent ruling by the Swiss Federal Supreme Court has now deemed the condition of an ongoing employment relationship for the distribution of shares to be unlawful and void under certain circumstances.
The Three Kinds of Employee Remuneration
In Swiss employment law, a distinction is made between the following three types of remuneration, namely:
- Variable salary
A variable salary is assumed if the amount can be fixed or objectively determined, i.e. contractually agreed and calculated on the basis of clear objective criteria (e.g. profit, turnover, operating result). The employer has no discretion in calculating this amount. If compensation meets these requirements, it is considered a variable component of remuneration that the employer must pay to the employee (Art. 322 f. OR; BGE 141 III 407 E. 4.2.1; 136 III 313 E. 2; 129 III 276 E. 2).
- Gratuity without entitlement on the part of the employee
If a gratuity is paid voluntarily to the employee as special remuneration, the employee cannot claim it in court if the payment is based solely on the employer’s discretion, there are no objective criteria for the amount of the gratuity and there is no contractual agreement on the payment of such remuneration. This is often the case with a ‘Christmas bonus’ or a birthday gift.
- Gratuities to which the employee is entitled
If a gratuity has been contractually agreed between the parties and is therefore no longer voluntary, it is once again a component of wages to which the employee is legally entitled. This type of gratuity is often seen in the form of a 13th month’s salary.
Although the distinction may sound simple at first, distinguishing between these three types of compensation is often complicated in practice and is the subject of many court cases.
New Federal Supreme Court ruling (BGE 4A_506/2023) reclassifies RSU as a variable salary component even if the employment relationship has been terminated
Under an employment contract dated 2 September 2019, a new employee was granted remuneration in the amount of CHF 700,000.00 in the form of RSUs. The RSUs were to be paid out in three tranches, namely upon hiring, after 12 months of service and finally the last tranche after 24 months of service. Due to mass redundancies, the employment relationship was terminated without fault on the part of the employee on 31 August 2020. The employer subsequently refused to pay the employee the third instalment, arguing that the RSUs were a bonus linked to the condition of an intact employment relationship. The employee contested this, arguing that this remuneration was a variable component of his salary. The case had to be ultimately decided by the Federal Supreme Court, which had to clarify the question of how RSUs should be classified.
Decision of the Federal Supreme Court
Since the amount of CHF 700,000.00 was contractually agreed and the date of payment was also clearly defined, and there was therefore no discretion or voluntariness regarding the payment and the amount of the payment, the Federal Supreme Court classified the awarded RSUs as a component of salary. Based on this classification, the Federal Supreme Court then concluded that a clause making the payment of RSU’s dependent on the employee still was employed at a certain point in time is unlawful and void (Art. 20 para. 2 CO). Thus, the payment is owed on a pro rata basis corresponding to the duration of the employment relationship.
In summary, this means that great caution is required when granting employees contractual compensation that is subject to conditions and seeking legal advice to phrase respective clauses is strongly advised.
