The Corporate Group Trap: Parent Company Cannot Terminate a Subsidiary’s Employment Contract

In ruling 4A_625/2025 of 1 May 2026, the Swiss Federal Supreme Court ruled that a separation agreement concluded between a senior executive and the parent company of an international group was void in its entirety because the parent company was not the executive’s contractual employer.

The decision is particularly relevant for (multinational) corporate group structures, where reporting lines, payroll arrangements, management roles and contractual relationships do not always coincide. The ruling stresses the importance of verifying which group entity is legally the employer before negotiating or signing an agreement.

General Overview: Group Functions and Contractual Employer Status

Under Swiss law, a corporate group is not treated as a single employer. Each group company remains a separate legal entity with its own rights and obligations.

In complex group structures, identifying the contractual employer may—as shown in the case discussed—be difficult. An employee may hold a group-wide position, report directly to the parent company, participate in its management and perform services predominantly for the wider group, while formally remaining employed by a subsidiary. Such operational factors may very well be relevant, but they do not in themselves determine employer status. The decisive question is which entity is party to the employment relationship based on the parties’ contractual arrangements and actual common intention.

Facts of the Case

The employee (a senior executive) was initially employed by the parent company of an international corporate group. In 2007, however, his employment contract was transferred to a group subsidiary. The transfer was communicated in writing and expressly accepted by the employee. The subsidiary subsequently acted as his employer, including by paying his remuneration.

Despite his transfer as an employee to the subsidiary from the parent company, the employee remained closely integrated into the parent company. He served as Global Chief Operating Officer and later as Deputy CEO of the parent company, was a member of its executive management, reported to the Group CEO and performed significant group-wide functions.

In November 2020, the executive and the parent company entered into a separation agreement providing for termination of the employment relationship as of 31 December 2021, a one-year post-contractual non-compete and compensation of approximately EUR 4.25 million.

The parent company then refused payment stating “formal errors in the separation agreement”, which is why the employee eventually initiated court proceedings.

Key Legal Findings

The Swiss Federal Supreme Court acknowledged that the present circumstances created genuine uncertainty as to the employee’s legal relationship within the group. In particular, several factors pointed towards a close relationship and possible employment relationship with the parent company, such as:

• his group-wide executive functions;
• his membership in the parent company’s executive management;
• his direct reporting line to the Group CEO; and
• the parent company’s involvement in setting performance targets and allocating performance share units.

However, these factors were according to the Swiss Federal Supreme Court insufficient to establish that the employment relationship had been with or transferred back to the parent company since 2007.

The Swiss Federal Supreme Court placed particular importance on the contractual history. The employment relationship had been transferred to the subsidiary in 2007 with the agreement of the parties, and the subsidiary had subsequently acted as employer. No later agreement transferring the employment relationship back to the parent company had been established. It further emphasised that corporate functions and contractual employment must be analysed separately. An employee may hold an office or perform substantial management functions for one group company while being contractually employed by another.

Therefore, the Swiss Federal Supreme Court came to the conclusion that because the subsidiary was in fact the contractual employer, the parent company had no authority to terminate the employment relationship by separation agreement. The termination provision in the separation agreement was therefore deemed void under Art. 20 CO.

This defect proved fatal to the entire agreement. The termination date, non-compete obligation and EUR 4.25 million compensation formed a single economic arrangement according to the Swiss Federal Supreme Court and could not be separated. Even the agreement’s severability clause could not preserve the remaining provisions. Thus, the entire separation agreement was deemed void by the Swiss Federal Supreme Court.

 

Practical Significance

The ruling highlights a potentially costly risk in employee exits within corporate groups, as the entity negotiating the departure is not necessarily the entity legally entitled to terminate the employment relationship.

Before a separation agreement is signed, it is of utmost importance to verify the contractual relationships rather than relying on organisational reality. In particular, the original employment agreement and any subsequent amendments or transfers, as well as payroll arrangements, secondments, intercompany arrangements and changes in the executive’s corporate functions must be reviewed before signing any exit documents.

This case illustrates that reporting lines, group titles, management responsibilities, remuneration arrangements and organisational integration may be relevant indicators of where employer identity lies but ultimately cannot override a documented transfer of the employment relationship to another group entity.

The safest approach is therefore to ensure that the entity that is the contractual employer is a party to and signs the separation agreement through duly authorised representatives. If another group company—for example, the parent company—is to assume severance, non-compete or other obligations, its role should be expressly and separately defined.

Finally, corporate mandates should not be confused with employment relationships. If an employee simultaneously holds board, management or other corporate offices within different group companies, the termination of those mandates should be addressed separately.